Insurance Contracts CP - Law Reform Commission
Insurance Contracts CP - Law Reform Commission
Insurance Contracts CP - Law Reform Commission
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CONSULTATION PAPER<br />
INSURANCE CONTRACTS<br />
(LRC <strong>CP</strong> 65 - 2011)<br />
© COPYRIGHT<br />
<strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong><br />
FIRST PUBLISHED<br />
December 2011<br />
ISSN 1393-3140
LAW REFORM COMMISSION‘S ROLE<br />
The <strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong> is an independent statutory body established by the <strong>Law</strong> <strong>Reform</strong><br />
<strong>Commission</strong> Act 1975. The <strong>Commission</strong>‘s principal role is to keep the law under review and to make<br />
proposals for reform, in particular by recommending the enactment of legislation to clarify and modernise<br />
the law. Since it was established, the <strong>Commission</strong> has published over 160 documents (Consultation<br />
Papers and Reports) containing proposals for law reform and these are all available at www.lawreform.ie.<br />
Most of these proposals have led to reforming legislation.<br />
The <strong>Commission</strong>‘s law reform role is carried out primarily under a Programme of <strong>Law</strong> <strong>Reform</strong>. Its Third<br />
Programme of <strong>Law</strong> <strong>Reform</strong> 2008-2014 was prepared by the <strong>Commission</strong> following broad consultation and<br />
discussion. In accordance with the 1975 Act, it was approved by the Government in December 2007 and<br />
placed before both Houses of the Oireachtas. The <strong>Commission</strong> also works on specific matters referred to<br />
it by the Attorney General under the 1975 Act.<br />
The <strong>Commission</strong>‘s role also involves making legislation more accessible through three other related<br />
areas of activity, Statute <strong>Law</strong> Restatement, the Legislation Directory and the Classified List of Legislation<br />
in Ireland. Statute <strong>Law</strong> Restatement involves the administrative consolidation of all amendments to an Act<br />
into a single text, making legislation more accessible. Under the Statute <strong>Law</strong> (Restatement) Act 2002,<br />
where this text is certified by the Attorney General it can be relied on as evidence of the law in question.<br />
The Legislation Directory - previously called the Chronological Tables of the Statutes - is a searchable<br />
annotated guide to legislative changes. The Classified List of Legislation in Ireland is a list of all Acts of<br />
the Oireachtas that remain in force, organised under 36 major subject-matter headings.<br />
ii
MEMBERSHIP<br />
The <strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong> consists of a President, one full-time <strong>Commission</strong>er and three part-time<br />
<strong>Commission</strong>ers.<br />
The <strong>Commission</strong>ers at present are:<br />
President:<br />
Vacant at the time of going to print (December 2011)<br />
Full-time <strong>Commission</strong>er:<br />
Patricia T. Rickard-Clarke, Solicitor<br />
Part-time <strong>Commission</strong>er:<br />
Professor Finbarr McAuley<br />
Part-time <strong>Commission</strong>er:<br />
Marian Shanley, Solicitor<br />
Part-time <strong>Commission</strong>er:<br />
The Hon Mr Justice Donal O‘Donnell, Judge of the Supreme Court<br />
iii
LAW REFORM RESEARCH STAFF<br />
Director of Research:<br />
Raymond Byrne BCL, LLM (NUI), Barrister-at-<strong>Law</strong><br />
Legal Researchers:<br />
Kate Clancy, LLB (Hons) (TCD)<br />
Conor Cunningham BCL (Clinical) (NUI), LLM (UCL)<br />
Dannie Hanna BCL (NUI), LLM (Cantab)<br />
Donna Lyons LLB (Dub), LLM (NYU), Attorney at <strong>Law</strong> (NY)<br />
Tara Murphy BCL (<strong>Law</strong> with French <strong>Law</strong>) (NUI), LLM (Essex), Barrister-at-<strong>Law</strong><br />
Máire Reidy BCL (NUI), LLM (NUI), Barrister-at-<strong>Law</strong><br />
STATUTE LAW RESTATEMENT<br />
Project Manager for Restatement:<br />
Alma Clissmann, BA (Mod), LLB, Dip Eur <strong>Law</strong> (Bruges), Solicitor<br />
Legal Researcher:<br />
Elaine Cahill, BBLS, LLM Eur <strong>Law</strong> (NUI), Dipl. IP & IT, Solicitor<br />
LEGISLATION DIRECTORY<br />
Project Manager for Legislation Directory:<br />
Heather Mahon LLB (ling. Ger.), M.Litt, Barrister-at-<strong>Law</strong><br />
Legal Researchers:<br />
Aoife Clarke BA (Int.), LLB, LLM (NUI)<br />
Barbara Brown BA (Int.), LLB, Attorney-at-<strong>Law</strong> (NY)<br />
Rachel Kemp BCL (<strong>Law</strong> and German) LLM (NUI)<br />
Aileen O‘Leary BCL, LLM, AITI, Solicitor<br />
iv
ADMINISTRATION STAFF<br />
Head of Administration and Development:<br />
Ciara Carberry<br />
Executive Officer:<br />
Ann Byrne<br />
Legal Information Manager:<br />
Conor Kennedy BA, H Dip LIS<br />
Cataloguer:<br />
Eithne Boland BA (Hons), HDip Ed, HDip LIS, LLB<br />
Clerical Officers:<br />
Ann Browne<br />
Liam Dargan<br />
PRINCIPAL LEGAL RESEARCHERS FOR THIS CONSULTATION PAPER<br />
Prof Robert Clark<br />
Conor Cunningham BCL (Clinical) (NUI), LLM (UCL)<br />
Gerard Sadlier BCL (NUI) (Oxon), LLM (NUI)<br />
v
CONTACT DETAILS<br />
Further information can be obtained from:<br />
<strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong><br />
35-39 Shelbourne Road<br />
Ballsbridge<br />
Dublin 4<br />
Telephone:<br />
+353 1 637 7600<br />
Fax:<br />
+353 1 637 7601<br />
Email:<br />
info@lawreform.ie<br />
Website:<br />
www.lawreform.ie<br />
vi
ACKNOWLEDGEMENTS<br />
The <strong>Commission</strong> would like to thank the following people who provided valuable assistance:<br />
Elizabeth Bothwell, Arthur Cox, Solicitors<br />
Roddy Bourke, Solicitor, McCann FitzGerald, Solicitors<br />
Gary Davis, Deputy Data Protection <strong>Commission</strong>er<br />
David Hertzell, Solicitor, <strong>Commission</strong>er, <strong>Law</strong> <strong>Commission</strong> of England and Wales<br />
Joe Meade, former Financial Services Ombudsman<br />
Joseph Morley, Central Bank of Ireland<br />
Kevin Murphy, National Consumer Agency<br />
Deirdre Norris, Central Bank of Ireland<br />
Adrian O’Brien, Central Bank of Ireland<br />
Eamon Shackleton, <strong>Insurance</strong> Institute of Ireland<br />
Christina Sparks, Solicitor, <strong>Law</strong> <strong>Commission</strong> of England and Wales<br />
Full responsibility for this publication lies, however, with the <strong>Commission</strong>.<br />
vii
viii
TABLE OF CONTENTS<br />
Table of Key Legislation<br />
Table of Key Cases<br />
xv<br />
xvii<br />
INTRODUCTION 1<br />
A Background: <strong>Insurance</strong> Contract <strong>Law</strong> 1<br />
B <strong>Insurance</strong> Contract <strong>Law</strong>: Some Key<br />
Common <strong>Law</strong> Principles 1<br />
C <strong>Insurance</strong> Contract <strong>Law</strong>: pre-1922 Legislation 1<br />
D Regulation and Supervision of <strong>Insurance</strong>:<br />
pre-1922 Legislation 2<br />
E Regulation and Supervision of <strong>Insurance</strong><br />
during the 20 th Century 2<br />
F Regulation and Supervision of <strong>Insurance</strong>: the<br />
EU influence 2<br />
G Statutory Regulation of <strong>Insurance</strong> <strong>Contracts</strong> 3<br />
H Regulation and Oversight by the Financial Regulator<br />
and the Financial Services Ombudsman (FSO) 3<br />
I The development of Principles of European<br />
<strong>Insurance</strong> Contract <strong>Law</strong> (PEICL) 4<br />
J The <strong>Commission</strong>‘s General Approach in this<br />
Consultation Paper 4<br />
A Outline of Consultation Paper 5<br />
CHAPTER 1 REGULATORY CONTEXT 9<br />
A Introduction 9<br />
B Overlapping regulation of Irish insurance contract<br />
law and commercial practices 9<br />
(1) Regulatory overlaps – financial services legislation 9<br />
(2) Regulatory Overlaps – Competition <strong>Law</strong> 9<br />
(3) Regulatory Overlaps - Equality Legislation 10<br />
(4) Regulatory Overlaps - The Data Protection<br />
<strong>Commission</strong>er 11<br />
(5) Regulatory Overlaps – Consumer Protection<br />
Agencies 13<br />
(6) Financial Services and consumers 14<br />
(7) The Jurisdiction of the Financial Services<br />
Ombudsman 14<br />
(8) Merger of the Industry ADR Scheme with the<br />
Statutory Model 15<br />
C European Union Initiatives on <strong>Insurance</strong> Regulation 17<br />
(1) Single Market for <strong>Insurance</strong> 17<br />
(2) Adverse comments on the proposed insurance<br />
contracts directive – the <strong>Law</strong> <strong>Commission</strong> for<br />
England and Wales 18<br />
(3) Recent European Developments 18<br />
(4) The Restatement of European <strong>Insurance</strong><br />
Contract <strong>Law</strong> – The Project Group 20<br />
D New Legal Norms and forms of Dispute Resolution 22<br />
(1) The adjudications of the <strong>Insurance</strong><br />
Ombudsman 1992-1998 22<br />
(2) Decisions of the Financial Services Ombudsman 24<br />
(3) The failure to legislate 24<br />
ix
E The need for contract law reform 25<br />
(1) Sources of new rules 25<br />
(2) <strong>Reform</strong> Proposals in the United Kingdom –<br />
support for legislative changes 26<br />
(3) The Financial Regulator – consumer<br />
protection code 27<br />
F Conclusions and Provisional Recommendations 27<br />
CHAPTER 2 INSURABLE INTEREST 29<br />
A Introduction 29<br />
B The emergence of the insurable interest requirement 31<br />
C Modern development of insurance interest and<br />
factual expectation in other jurisdictions 35<br />
(1) Canada, Australia, the USA and South Africa 35<br />
(2) The current British debate on Insurable interest 38<br />
(3) Conclusions on the Bitish debate 40<br />
D The insurable interest test in Irish <strong>Law</strong> 43<br />
E Conclusion on the insurable interest test 45<br />
F Insurable interest in Life Policies – common law<br />
and statute law 45<br />
G Should a remodelled section 1 of the Life Assurance<br />
Act 1774 be re-enacted as a formalities provision? 47<br />
(1) Natural Love and Affection 47<br />
(2) A potential financial loss recognised by law<br />
which existed at the time of contracting 48<br />
(3) Statutory obligations 48<br />
(4) The Miscellaneous Category 49<br />
(5) The limits of natural love and affection 49<br />
(6) Debtors and creditors 52<br />
(7) Property insurance 52<br />
(8) Valuation Difficulties 53<br />
H <strong>Reform</strong>ing the insurable interest requirement in<br />
Ireland 54<br />
(1) Proposals for <strong>Reform</strong> – A Broad or Narrow<br />
Approach? 55<br />
(2) Non Indemnity <strong>Insurance</strong> and the Insurable<br />
Interest 56<br />
(3) Moral hazard/deterrence 56<br />
(4) Pleas of illegality 58<br />
(5) Options for reform under the <strong>Law</strong> <strong>Commission</strong>s<br />
Issues Paper – the regulatory definition question 59<br />
(6) Defining <strong>Insurance</strong> <strong>Contracts</strong> in Irish <strong>Law</strong> 60<br />
(7) The insurance/gaming divide – current review<br />
of gambling legislation 60<br />
CHAPTER 3 DUTY OF DISCLOSURE 63<br />
A Introduction 63<br />
B The Duty of Disclosure in <strong>Insurance</strong> <strong>Contracts</strong> 63<br />
C Constructive Knowledge and Non-disclosure 67<br />
D Materiality and Inducement 70<br />
(1) Materiality: decisive influence or ―what the<br />
insurer would like to know‖ 71<br />
(2) Examples of the Duty of Disclosure in Operation 72<br />
E What the Proposer does not have to disclose 74<br />
(1) Knowledge 74<br />
(2) Factors reducing the risk 76<br />
x
CHAPTER 4<br />
(3) Factors covered by any warranty 76<br />
(4) Waiver 76<br />
(5) The IIF Life Assurance Code of Practice and<br />
Ombudsman Adjudications on Non disclosure 78<br />
(6) Non-Disclosure – the 1957 <strong>Reform</strong> Proposals in<br />
England and Wales 81<br />
(7) The English <strong>Law</strong> <strong>Commission</strong>‘s 1979 Working<br />
Paper 81<br />
(8) The English <strong>Law</strong> <strong>Commission</strong>‘s 1980 Report 83<br />
(9) The general duty of disclosure in the 1980<br />
Report 83<br />
(10)Australia 85<br />
(11)New Zealand 85<br />
(12)The Principles of European <strong>Insurance</strong> Contract<br />
<strong>Law</strong> (PEICL) 86<br />
(13)British Consumer <strong>Insurance</strong> (Disclosure and<br />
Representations) Bill 2011 87<br />
F General Conclusions 88<br />
PRE-CONTRACTUAL MISREPRESENTATION<br />
AND INSURANCE CONTRACTS 91<br />
A Introduction 91<br />
B Judicial approaches to limiting actionable<br />
misrepresentation 92<br />
(1) ―Reading down‖ the statement 92<br />
(2) Honest belief 92<br />
(3) Agent liability 92<br />
(4) Ambiguous questions 92<br />
(5) Interpretation of Ambiguous Answers 94<br />
(6) Are questions asked presumed to be seeking<br />
to identify material facts? 94<br />
(7) Is a failure to answer questions<br />
misrepresentation? 95<br />
(8) Spent Convictions 97<br />
C Misrepresentation – rescission as the primary<br />
remedy 97<br />
(1) Marine <strong>Insurance</strong> Act 1906 and<br />
misrepresentation 98<br />
(2) Limited reforms in Sale of Goods and Supply<br />
of Services Act 1980 99<br />
(3) Should the right to rescind be lost in cases<br />
where the proposer makes a negligent<br />
misrepresentation? 100<br />
(4) Fraudulent Misrepresentation 103<br />
(5) Misrepresentation – the <strong>Insurance</strong><br />
Ombudsman of Ireland Decisions 105<br />
(6) Developments in the United Kingdom on<br />
misrepresentation 106<br />
(7) Innocent misrepresentation 108<br />
CHAPTER 5 WARRANTIES 109<br />
A Introduction 109<br />
B Warranties in General 109<br />
(1) Warranties and Representations 110<br />
(2) Warranties – Matters of substance not form 111<br />
(3) The warranty must be a term of contract. 111<br />
xi
C<br />
(4) The matter warranted need not be material to<br />
the risk 111<br />
(5) It must be exactly complied with 112<br />
(6) A breach discharges the insurer from liability<br />
on the contract, even if the loss has no<br />
connection with the breach or that the breach<br />
has been remedied before the loss 113<br />
(7) Amelioration of the strict rules relating to<br />
warranties 113<br />
(8) Statutory Intervention 114<br />
(9) Warranties – Incorporation Requirements 115<br />
(10)Limiting the scope of the warranty 116<br />
(11)Basis of Contract Clauses 116<br />
(12)Warranties in Irish <strong>Law</strong>: the IIF Codes of<br />
Practice 118<br />
(13)United Kingdom Developments on Basis<br />
of Contract Clauses 119<br />
(14)Basis of Contract Clauses – The British 2007<br />
Consultation Paper 119<br />
(15)The 2009 Report and Draft Bill – Basis of<br />
Contract Clauses 120<br />
(16)Warranties in General – United Kingdom<br />
Developments 120<br />
(17)Warranties in Consumer <strong>Contracts</strong> in UK <strong>Law</strong><br />
(the 2007 Consultation Paper) 122<br />
(18)Warranties in Business <strong>Insurance</strong> (the 2007<br />
Consultation Paper) 123<br />
(19)The 2009 Report and Draft Bill 123<br />
(20)New Zealand Legislation 123<br />
(21)Provisional Recommendations 124<br />
Non-Observance of Warranty after Conclusion<br />
of Contract 124<br />
(1) Warranties and Causation 125<br />
(2) Precautionary Measures under the PEICL and<br />
Promissory Warranties 130<br />
(3) The Causation Problem and Promissory<br />
Warranties – Article 4:103 132<br />
(4) Discussion on unfair terms and the relationship<br />
with promissory warranties 133<br />
CHAPTER 6 EXCLUSIONS AND UNFAIR TERMS 137<br />
A Introduction 137<br />
B Rules on Incorporation 137<br />
(1) Interpretation of the Exclusion 138<br />
(2) General Principles to be added to Irish <strong>Law</strong> 139<br />
(3) 1993 Unfair Contract Terms Directive and<br />
PEICL Abusive Clauses Provisions 139<br />
(4) Core and Subsidiary Terms – An Irish View 141<br />
(5) Non Core Terms and Exclusions – The <strong>Law</strong><br />
<strong>Commission</strong>s Joint Consultation Paper 142<br />
(6) The PEICL View on the Boundary Between<br />
Core and Non-Core Terms 144<br />
(7) The 1995 Regulations and <strong>Insurance</strong><br />
Adjudications in Ireland 146<br />
(8) The PEICL Recommendation 147<br />
(9) Discussion on the Adoption of Article 2:304 148<br />
xii
(10)Enforcement 149<br />
CHAPTER 7 FORMALITIES 151<br />
CHAPTER 8<br />
A Introduction. 151<br />
B Legislation, Case <strong>Law</strong> and Codes of Practice 151<br />
(1) Limited legislative provisions 151<br />
(2) Case law 152<br />
(3) Self Regulation and Formalities 152<br />
(4) EU law and Formalities 154<br />
(5) EU <strong>Law</strong> – Cancellation Rights in relation to<br />
Life Assurance <strong>Contracts</strong> concluded by a<br />
Distance Contract 156<br />
(6) Pre-Contractual Information and Formalities<br />
in incentivising Best Practice Standards 156<br />
(7) A General Duty to Provide Pre-Contractual<br />
Information in PEICL 157<br />
C Recommendations 158<br />
(1) No written requirements 158<br />
(2) The Provision of a Policy Document 159<br />
(3) A Right of Withdrawal or Cooling Off Period 160<br />
(4) The PEICL and Notices to be provided by and<br />
to the Insurer 160<br />
(5) How Information is to be provided 161<br />
(6) Information on Renewal: Information upon<br />
refusal of a proposal? 162<br />
THE DUTY OF UTMOST GOOD FAITH - POST<br />
CONTRACTUAL ASPECTS 163<br />
A Introduction 163<br />
B Rationale for the duty of utmost good faith 164<br />
C Post contractual duty of good faith – the duty not<br />
to make a fraudulent claim 167<br />
D Non payment of a fraudulent claim, not avoidance<br />
of the policy 168<br />
E Other (contractual) remedies 169<br />
F Effects of fraud 170<br />
G Co-insurance and moral hazard 171<br />
H Is there a duty in claims processing? 175<br />
I Has an insurer a right to damages against the<br />
insured? 178<br />
J Claims handling: An Alternative Approach? 179<br />
K Recommendation on the duty of utmost good faith 180<br />
CHAPTER 9 THIRD PARTY RIGHTS 181<br />
A Introduction 181<br />
B The Problem in Context 182<br />
C Third party recovery – What the <strong>Commission</strong> will<br />
not address 183<br />
(1) Road traffic legislation 183<br />
(2) Employers Liability 183<br />
D Exceptions to the Privity Rule 184<br />
(1) Exceptions via judge-made law 184<br />
E Insurable Interest and Privity 186<br />
F Recommendations of the <strong>Commission</strong> in the<br />
2008 Report 187<br />
G Variation or cancellation of the Third Party Right? 188<br />
xiii
H Third Party Beneficiary – A definition? 189<br />
I The Australian General <strong>Insurance</strong> Provision<br />
as a Model? 189<br />
J The Australian Treasury Review and Section 48 190<br />
K The Australian <strong>Insurance</strong> <strong>Contracts</strong> Amendment<br />
Bill 2010 – Breach of the Duty of Good Faith<br />
and Third Parties 191<br />
CHAPTER 10 REMEDIES 195<br />
A Introduction 195<br />
B Compensatory Remedies – Proportionality 195<br />
(2) The Irish Experience 197<br />
C Compensatory Remedies – Building on the<br />
1980 Act 201<br />
D Compensatory Remedies – damages for late<br />
payment of a claim 203<br />
E Non-Pecuniary Loss and Damages 206<br />
F Exemplary Damages and the 2000 Report 210<br />
G Subrogation – Public Policy Exceptions 211<br />
(2) Limitations on Subrogation Rights 213<br />
(3) The Queensland Report on Vicarious Liability 216<br />
(4) Canada – Lister 217<br />
(5) <strong>Reform</strong> of Lister in the United Kingdom 218<br />
(6) Discussion and Recommendation 218<br />
H Recasting Conditions and Warranties as<br />
Innominate Terms 218<br />
CHAPTER 11 PROVISIONAL RECOMMENDATIONS 221<br />
xiv
TABLE OF KEY LEGISLATION<br />
Assurance Companies Act 1909 9 Ed. 7 Ch.49 Irl<br />
Civil Liability Act 1961 No 41/1961 Irl<br />
Consumer Protection Act 2007 No 19/2007 Irl<br />
Disablity Act 2005 No 14/2005 Irl<br />
Employment Equality Act 1998 No 21/1998 Irl<br />
Equal Status Act 2000 No 8/2000 Irl<br />
Equality Act 2004 No 24/2004 Irl<br />
Friendly Societies Act 1896 59 & 60 Vic. c.<br />
25<br />
Eng<br />
Gaming Act 1845 8 & 9 Vict. c.109 Eng<br />
Gaming and Lotteries Act 1956 No 2/1956 Irl<br />
Industrial Assurance and Friendly Societies Act<br />
1929<br />
19 & 20 Geo Vic.<br />
28<br />
Eng<br />
<strong>Insurance</strong> Act 1936 No 45/1936 Irl<br />
<strong>Insurance</strong> Act 1989 No 3/1989 Irl<br />
<strong>Insurance</strong> Act 2000 No 42/2000 Irl<br />
<strong>Insurance</strong> Amendment Act 2009<br />
SBC 2009 Chap<br />
16<br />
Can.<br />
BC<br />
<strong>Insurance</strong> <strong>Contracts</strong> Act 1984 No 80 of 1984 Aus<br />
Life Assurance Act 1774 14 Geo. 3 c.48 Eng<br />
Life Assurance Companies Act 1870<br />
Life <strong>Insurance</strong> (Ireland) Act 1866<br />
33 & 34 Vict.<br />
c.61<br />
29 & 30 Vict.<br />
c.42<br />
Irl<br />
Irl<br />
Marine <strong>Insurance</strong> Act 1906 c.41 Eng<br />
Misrepresentation Act 1967 c.7 Eng<br />
Road Traffic Act 1961 No 24/1961 Irl<br />
Sale of Goods Act 1893<br />
56 & 57 Vict.<br />
C.71<br />
Eng<br />
Sale of Goods and Supply of Services Act 1980 No 16/1980 Irl<br />
Unfair Contract Terms Directive 93/13/EC SI 27 of 1995 Irl<br />
xv
TABLE OF KEY CASES<br />
Agapitos v Agnew (No 1) [2002] EWCA Civ 247 UK 164<br />
Pg<br />
No.<br />
Analog Devices BV v Zurich<br />
<strong>Insurance</strong> Company<br />
[1950] IR 85 Irl 85<br />
Anderson v Fitzgerald (1853) 3 ICLR 475 Eng 106<br />
Aro Road and Land Vehicles<br />
Ltd v <strong>Insurance</strong> Corporation of<br />
Ireland Ltd<br />
[1986] IR 403 Irl 58<br />
Aviva <strong>Insurance</strong> Ltd v Brown [2011] EWHC 362 UK 162<br />
Axa General <strong>Insurance</strong> Ltd v<br />
Gottlieb<br />
[2005] EWCA Civ 112 UK 163<br />
Bates v Hewitt (1867) LR 2 QB 595 Eng 66<br />
Bennett v Axa <strong>Insurance</strong> Plc [2003] EWHC 86 (Comm) UK 124<br />
Carna Foods Ltd v Eagle Star<br />
<strong>Insurance</strong> Co<br />
Carroll v An Post National<br />
Lottery<br />
[1997] 2 ILRM 499 Irl 156<br />
[1996] 1 IR 443 Irl 131<br />
Carter v Boehm (1766) 3 Burr 1905 UK 55<br />
Chariot Inns v Assicurazioni<br />
General Spa<br />
City of Los Angeles<br />
Department of Water and<br />
Power v Manhart<br />
Coleman v New Ireland<br />
Assurance plc<br />
Condogianis v Guardian<br />
Assurance Co<br />
Constitution <strong>Insurance</strong><br />
Company of Canada v<br />
Kosmopoulos<br />
Dalby v The India and London<br />
Life<br />
[1981] IR 199 Irl 59<br />
(1998) 435 US 702 US 14<br />
[2009] IEHC 273 Irl 58<br />
(1923) 29 CLR 341 Eng 86<br />
(1987) 34 DLR (4th) 208 CAN 27<br />
(1854) 15 CB 365 UK 44<br />
Dalgish v Jarvie (1850) 2 M&G 231 Eng 64<br />
De Hahn v Hartley (1786) 1 TR 343 UK 107<br />
Derry v Peek (1889) 14 App Cas 337 UK 96<br />
Direct Line <strong>Insurance</strong> Plc v<br />
Khan<br />
Director General of Fair<br />
Trading v First National Bank<br />
Drake <strong>Insurance</strong> Plc v<br />
Provident <strong>Insurance</strong> Plc<br />
[2002] Lloyd's Rep 364 UK 169<br />
[2002] 1 AC 481 UK 138<br />
[2003] EWCA Civ 1834 UK 172<br />
xvii
Pg<br />
No.<br />
Economides v Commercial<br />
Union <strong>Insurance</strong> Ltd<br />
Fagan v General Accident Fire<br />
and Life Assurance Corp Plc<br />
[1997] 3 All ER 636 Eng 61<br />
HC Unrep. 19 Feb 1993 Irl 167<br />
Fargnoli V GA Bonus plc [1997] CLC 653 UK 172<br />
Farrell v South East<br />
Lancashire <strong>Insurance</strong> Co<br />
Feasey v Sun Life Assurance<br />
of Canada<br />
Glengate-KG Properties Ltd v<br />
Norwich Union Fire <strong>Insurance</strong><br />
Society Ltd<br />
[1933] IR 297 Irl 103<br />
[2003] EWCA Civ 885 UK 41<br />
[1996] 1 Lloyd's Rep 614 UK 31<br />
Harney v Century <strong>Insurance</strong> [1983] IEHC 16 Irl 62<br />
Hartford Protection <strong>Insurance</strong><br />
Co v Harmes<br />
Highlands <strong>Insurance</strong> v<br />
Continental <strong>Insurance</strong><br />
HIH Casualty and General<br />
<strong>Insurance</strong> Ltd v New<br />
Hampshire <strong>Insurance</strong> Co<br />
Holt's Motors Ltd v South East<br />
Lancashire <strong>Insurance</strong><br />
Interfoto Picture Library Ltd v<br />
Stiletto Visual Programs Ltd<br />
Investors Compensation<br />
Scheme Ltd v West Bromwich<br />
Building Society<br />
(1853) 2 Ohio St 452 US 57<br />
[1987] 1 Lloyd's Rep 109 UK 94<br />
[2001] EWCA (Civ) 735 UK 105<br />
(1930) 35 Com. Cas 281 UK 86<br />
[1988] 1 All ER 348 UK 131<br />
[1998] 1 All ER 98 UK 85<br />
James v Royal <strong>Insurance</strong> Co (1875) 9 ILTR 194 Irl 44<br />
Joel v <strong>Law</strong> Union <strong>Insurance</strong><br />
Co.<br />
Johnson v Medical Defence<br />
Union<br />
Jones v Welsh <strong>Insurance</strong><br />
Corporation<br />
Keating v New Ireland<br />
Assurance Company<br />
[1908] 2 KB 863 UK 65<br />
[2007] EWCA Civ 262 UK 156<br />
[1937] 4 All ER 149 UK 119<br />
[1990] ILRM 110 Irl 58<br />
Keenan v Shield <strong>Insurance</strong> Co [1987] IR 113 Irl 105<br />
Kelleher v Cristopherson (1957) 91 ILTR 191 Irl 119<br />
Lambert v Co-operative<br />
<strong>Insurance</strong><br />
[1975] 1 Lloyd's Rep 169 UK 3<br />
Leen v Hall (1923) 16 2 ILR 100 Irl 66<br />
Locker & Woolf Ltd v Western [1936] 1 KB 408 UK 65<br />
xviii
Australian <strong>Insurance</strong> Co<br />
Pg<br />
No.<br />
London Assurance v Mansel (1879) 11 Ch 363 UK 64<br />
Lucena v Craufurd (1808) 1 Taut 325 UK 25<br />
Macaura v Northern<br />
Assurance Co Ltd<br />
Mackay v London General<br />
<strong>Insurance</strong> Co<br />
Manifest Shipping Co. Ltd v<br />
Uni-Polaris Shipping Co. Ltd<br />
(The Star Sea)<br />
Manor Park Homebuilders Ltd<br />
v AIG Europe (Ireland) Ltd<br />
Mark Rowlands Ltd v Berni<br />
Inns<br />
[1925] AC 619 UK 27<br />
(1935) 51 LI.LR 201 UK 111<br />
[1997] 1 Lloyd's Rep 360 (CA) UK 163<br />
[2009] 1 ILRM 190 Irl 109<br />
[1986] QB 211 UK 32<br />
Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228 Aus 63<br />
McAleenan v AIG (Europe) Ltd [2010] IEHC 128 Irl 97<br />
McGeown v Direct Travel<br />
<strong>Insurance</strong><br />
Meisels v Norwich Union<br />
<strong>Insurance</strong> Ltd<br />
[2004] 1 All ER (Comm) 609 UK 85<br />
[2007] 1 All ER 1138 Eng 65<br />
Moran, Galloway & Co v Uzielli [1905] 2 KB 555 UK 27<br />
New Zealand <strong>Insurance</strong> Co Ltd<br />
v Harris<br />
Odyssey Cinemas Ltd v<br />
Village Theatres Three Ltd<br />
Pan Atlantic <strong>Insurance</strong> Co. Ltd<br />
v Pine Top <strong>Insurance</strong> Co. Ltd<br />
Parsons v Falmers Mutual<br />
<strong>Insurance</strong> Association<br />
Petrofina (UK) v Magnaload<br />
Ltd<br />
[1990] 1 NZLR 10 NZ 121<br />
[2010] NI Ch 1 NI 95<br />
[1994] 3 All ER 581 UK 62<br />
[1972] NZLR 966 NZ 120<br />
[1983] 2 Lloyd's Rep 91 UK 31<br />
Peyman v Lanjani [1985] Ch 157 UK 70<br />
PJ Carrigan Ltd and Carrigan<br />
v Norwich Union Fire Society<br />
Ltd<br />
High Court 11 December 1987 Irl 35<br />
Re Application of Butler [1970] IR 45 Irl 105<br />
Re Sweeney & Kennedy's<br />
Arbitration<br />
[1986] ILRM 419 Irl 85<br />
Regina Fur Co v Bossom [1958] 2 Lloyd's Rep 425 UK 65<br />
Roberts v Avon <strong>Insurance</strong> Co [1956] 2 Lloyd's Rep 240 UK 69<br />
Rohan Construction Ltd v<br />
<strong>Insurance</strong> Corporation of<br />
[1986] ILRM 419 Irl 85<br />
xix
Ireland Ltd<br />
Pg<br />
No.<br />
Roselodge Ltd v Castle [1966] 2 Lloyd's Rep 113 UK 61<br />
Ross v Bradshaw (1761) 1 Wm.Bl 312 Eng 68<br />
Ryanair Ltd v Billigfluege.de<br />
GmbH<br />
[2010] IEHC 18 Irl 132<br />
Schoolman v Hall [1951] 1 Lloyd's Rep 139 UK 65<br />
Scott v Wawanesa Mutual<br />
<strong>Insurance</strong> Co<br />
Sharon‘s Bakery (Europe) Ltd<br />
v Axa <strong>Insurance</strong> UK plc<br />
Sharp v Sphere Drake<br />
<strong>Insurance</strong> Ltd<br />
Sirius International <strong>Insurance</strong><br />
Corp v Oriental <strong>Insurance</strong><br />
Corp<br />
[1989] 1 SCR 1445 Can 169<br />
[2011] EWHC 210 (Comm) UK 65<br />
[1992] 2 Lloyd's Rep 501 UK 30<br />
[1999] 1 All ER (Comm) 699 UK 84<br />
The Mercandian Continent [2001] EWCA Civ 1275 UK 163<br />
US Trading Ltd v AXA<br />
<strong>Insurance</strong> Co Ltd<br />
Wall and Wall v The New<br />
Ireland Assurance Co.<br />
Widefree Ltd v Brit <strong>Insurance</strong><br />
Ltd<br />
Zeller v British Caymanian<br />
<strong>Insurance</strong> Co plc<br />
[2010] Lloyd's Rep 505 UK 132<br />
[1965] IR 386 Irl 50<br />
[2009] Lloyd's Rep 505 UK 132<br />
[2008] UKPC 4 UK 110<br />
xx
1<br />
INTRODUCTION<br />
A<br />
Background: <strong>Insurance</strong> Contract <strong>Law</strong><br />
1. This Consultation Paper forms part of the <strong>Commission</strong>‘s Third Programme of <strong>Law</strong> <strong>Reform</strong> 2008-<br />
14 1 and involves an examination of insurance contract law. In the Consultation Paper, the <strong>Commission</strong><br />
examines the following principles and rules concerning insurance contracts: the concept of ―insurable<br />
interest,‖ the duty of disclosure placed on the insured; the nature and scope of pre-contractual<br />
misrepresentation by the insured; the nature and effect of ―warranties‖ in insurance contracts, and their<br />
connection with ―basis of contract‖ clauses; the relationship between exclusions in insurance contracts<br />
and the general law on unfair contract terms; formalities (including specific terms that need to be drawn to<br />
the insured‘s attention); the duty of utmost good faith (uberrimae fidei) in insurance contract law; the<br />
rights of third parties; and remedies available for breach of the contract (including the scope of<br />
repudiation of the contract and monetary compensation). The Consultation Paper examines whether<br />
these principles and rules would benefit from statutory consolidation.<br />
B<br />
<strong>Insurance</strong> Contract <strong>Law</strong>: Some Key Common <strong>Law</strong> Principles<br />
2. <strong>Insurance</strong> contract law in Ireland has not, until now, been the subject of any systematic review<br />
since the foundation of the State in 1922. As the discussion in this Consultation Paper makes clear,<br />
some of the key features of insurance contract law (in common with those of contract law in general)<br />
derive from long-established principles and rules of common law (judge-made law). This includes the<br />
important principle (which the courts in Ireland continue to affirm) that, at the pre-contractual formation of<br />
the insurance contract, there is a duty on the person taking out the policy of insurance (the proposer) to<br />
disclose material information that is relevant to the risk that the insurer is being asked to take on. The<br />
Irish judiciary have also been careful to point out that the common law imposes more obligations on the<br />
insurer than is commonly believed to be the case. Indeed, at the heart of any discussion on insurance<br />
contract law is the nature and extent of the obligation on both parties to act with utmost good faith, the<br />
concept of uberrimae fidei.<br />
C<br />
<strong>Insurance</strong> Contract <strong>Law</strong>: pre-1922 Legislation<br />
3. In addition to important common law rules of insurance contract law, in 1922 the State carried<br />
over a large body of pre-1922 insurance legislation, beginning with the Life Assurance Act 1774. The<br />
antiquity of the 1774 Act has created difficult issues of interpretation, 2 and even relatively modern<br />
legislation such as the Marine <strong>Insurance</strong> Act 1906 has been criticised as producing a legal context ―so<br />
wholly inappropriate, in part at least, to the purpose of the transaction being effected.‖ 3 Nonetheless, Irish<br />
courts have, in general, 4 agreed with the view that the Marine <strong>Insurance</strong> Act 1906 is, in general, a<br />
codification of the common law rules on insurance that apply ―across the board‖. As the 1906 Act remains<br />
in force it has, by default, coloured the way in which even consumer insurance transactions are to be<br />
tested. As the <strong>Commission</strong> argues throughout the Consultation Paper, this approach requires reappraisal<br />
in the context of reform of insurance contract law, in particular bearing in mind the increased level of<br />
regulatory supervision that was enacted in the 20 th Century and has accelerated in the 21 st Century,<br />
including the influence of EU law.<br />
1<br />
2<br />
3<br />
4<br />
Report on Third Programme of <strong>Law</strong> <strong>Reform</strong> 2008-2014 (LRC 86-2007), Project 34.<br />
See Church and General <strong>Insurance</strong> Co v Connolly, High Court, 7 May 1981.<br />
Finlay CJ in Brady v Irish National <strong>Insurance</strong> Co Ltd [1986] ILRM 669, at 679.<br />
In Brady v Irish National <strong>Insurance</strong> Co Ltd [1986] IRLM 669, at 679 the Supreme Court assumed ―without<br />
deciding‖ that the 1906 Act applied to a policy relating to pleasure craft used exclusively on inland waters.<br />
1
D<br />
Regulation and Supervision of <strong>Insurance</strong>: pre-1922 Legislation<br />
4. Ellis and Wiltshire 5 observe that ―Government supervision of insurance companies in Ireland<br />
dates from the Life Assurance Companies Act 1870.‖ The 1870 Act required the deposit of £20,000 with<br />
the Accountant General of the Court of Chancery, a requirement to keep life funds separate from other<br />
business transacted by companies engaging in life assurance, as well as the preparation and filing of<br />
annual accounts of life and other assurance business. The Assurance Companies Act 1909 repealed the<br />
1870 Act and extended the regulatory structure in relation to life assurance into fire insurance, accident<br />
insurance, employer‘s liability and bond investment business, insofar as that business was not already<br />
the subject of a friendly society or trade union registration. The 1909 Act did not address industrial life<br />
assurance, that is, the activities of friendly societies and life assurance entities that granted life assurance<br />
via a mechanism for collecting premiums through collectors at periodical intervals of less than two<br />
months. The legislation in this area was consolidated in the Friendly Societies Act 1896 6 and the<br />
Collecting Societies and Industrial Assurance Companies Act 1896. 7 This was the key legislation in force<br />
in 1922 when the State was established.<br />
E<br />
Regulation and Supervision of <strong>Insurance</strong> during the 20 th Century<br />
5. The Oireachtas first made provision in respect of motor insurance in the Road Traffic Act 1933,<br />
but it was the <strong>Insurance</strong> Act 1936 that ushered in general licensing and deposit-making requirements for<br />
Irish companies wishing to transact business in ordinary and industrial life assurance, fire, bond,<br />
employer‘s liability, motor insurance, public liability, engineering, glass, guarantee and burglary insurance.<br />
Ellis and Wiltshire comment that, following the enactment of the 1936 Act, ―it became almost impossible<br />
for foreign companies to enter the Irish market.‖ 8 Although a ―reciprocity provision‖ was contained in the<br />
<strong>Insurance</strong> Act 1953 so as to facilitate limited entry to the Irish market by foreign companies, it was only<br />
through the market liberalisation provision of the EU regulatory regime (introduced from the 1970s<br />
onwards) that Irish insurance regulation lost its protectionist character. In addition to the 1936 Act, the<br />
other main legislative measures have been the <strong>Insurance</strong> Act 1989, the Investment Intermediaries Act<br />
1995, and the <strong>Insurance</strong> Act 2000.<br />
F<br />
Regulation and Supervision of <strong>Insurance</strong>: the EU influence<br />
6. These Acts have been supplemented by a significant number of Life <strong>Insurance</strong> Regulations and<br />
Non-Life <strong>Insurance</strong> Regulations made under the European Communities Act 1972 that have sought to<br />
implement requirements under various EU <strong>Insurance</strong> Directives. Together with the Acts already<br />
mentioned, these have enhanced the rules by which insurers are supervised, improving transparency<br />
requirements relating to insurers and intermediaries, as well as bringing intermediaries into a more<br />
rigorous regulatory environment.<br />
7. The regulatory significance of EU law in this area is also illustrated by its impact in the health<br />
insurance area. The monopoly afforded by the Voluntary Health <strong>Insurance</strong> Act 1957 to the State-owned<br />
Voluntary Health <strong>Insurance</strong> Board (VHI) was modified by subsequent legislation and thus facilitated the<br />
entry into the Irish market of private sector competitors. The European Court of Justice has ruled,<br />
however, in European Commisison v Ireland, 9 that the State has failed to comply with the provisions in<br />
5<br />
6<br />
7<br />
8<br />
9<br />
Ellis and Wiltshire, Regulation of <strong>Insurance</strong> in the UK, Ireland and the EU (Thomson Reuters Looseleaf) C.1-<br />
01.<br />
59 & 60 Vict. c.25. The Friendly Societies Act 1896, as amended, remains in force in Ireland.<br />
59 & 60 Vict. c.26.<br />
Ellis and Wiltshire, Regulation of <strong>Insurance</strong> in the UK, Ireland and the EU (Thomson Reuters Looseleaf) C.1-<br />
01.<br />
Case C-82/10, Judgment of the Court (Fourth Chamber), 29 September 2011. Legislation modifying the 1957<br />
Act was enacted in 1996, 1998, 2001 and 2008. The Court in particular did not accept that the enactment of<br />
the Voluntary Health <strong>Insurance</strong> Act 2008 (which has not been brought into force, as required, by a ministerial<br />
2
various EU Non-Life <strong>Insurance</strong> Directives by not legislating to require VHI to comply with certain<br />
prudential conditions, specifically the establishment of a guarantee fund and compliance with a required<br />
solvency margin. This has had the significant effect of ending the associated derogation afforded to<br />
Ireland by Article 4 of the First Non-Life <strong>Insurance</strong> Directive, Directive 73/239/EEC.<br />
G<br />
Statutory Regulation of <strong>Insurance</strong> <strong>Contracts</strong><br />
8. In addition to these significant regulatory legislative developments, the <strong>Insurance</strong> Acts have also<br />
affected individual insurance contract law, improving the protections and rights of proposers at the precontractual<br />
stage, as well as the protections and rights of insured persons after a contract of insurance<br />
has been agreed, the post-contractual stage. In so doing, the Acts have, in a number of respects,<br />
adjusted some of the common law rules of insurance contract law that have evolved through litigation. For<br />
example, the agency provisions in respect of tied brokers were adjusted in favour of the proposer by<br />
section 51 of the <strong>Insurance</strong> Act 1989. At a more general level, however, although section 61 of the<br />
<strong>Insurance</strong> Act 1989 grants sweeping powers to the Minister for Finance 10 to prescribe codes of conduct<br />
for insurance undertakings in respect of the duty of disclosure and warranties, this power has never been<br />
used. To some extent, these powers have been superceded by other regulatory developments, to which<br />
the Commisison now turns.<br />
H<br />
Regulation and Oversight by the Financial Regulator and the Financial Services<br />
Ombudsman (FSO)<br />
9. The legislative developments outlined briefly above have been supplemented in important<br />
respects through the establishment of the Office of the Financial Regulator 11 and of the Financial Services<br />
Ombudsman (FSO). 12 These statutory agencies were intended to improve the regulatory oversight of<br />
financial services (including insurance) and to provide for an inexpensive dispute resolution mechanism<br />
for consumers and small businesses. 13 A significant regulatory tool developed by the Financial Regulator<br />
Commencement Order) or the economic crisis currently facing the State could justify the failure to implement<br />
the relevant EU Directives.<br />
10<br />
11<br />
12<br />
13<br />
When the <strong>Insurance</strong> Act 1989 was enacted, the regulation of insurance undertakings generally had been the<br />
responsibility of the Minister for Industry and Commerce (now known as the Minister for Jobs, Enterprise and<br />
Innovation). The functions under the 1989 Act have since been transferred to the Minister for Finance, who<br />
also has responsibility at Government level for the regulation of other financial services undertakings.<br />
Under the Central Bank and Financial Services Authority of Ireland Act 2003. The Central Bank <strong>Reform</strong> Act<br />
2010 replaces the Central Bank and Financial Services Authority of Ireland and the Financial Regulator with a<br />
single unitary authority, the Central Bank of Ireland, which is structured around directorates and divisions. The<br />
Deputy Governor Financial Regulation oversees six divisions, two of which are <strong>Insurance</strong> Supervision and<br />
Consumer Protection.<br />
Under the Central Bank and Financial Services Authority of Ireland Act 2004, which inserted a new Part VIIB<br />
into the Central Bank Act 1942. The FSO was not affected by the changes made by the Central Bank Act<br />
2010.<br />
The <strong>Commission</strong> acknowledges that the ―principles only‖ (―light touch‖) approach to supervision by the<br />
Financial Regulator between 2004 and 2008 has, since 2008, been subject to extensive criticism in the wider<br />
context of the debate on the impact this may have had on the virtual collapse of the banking system in Ireland<br />
in 2008. The Commisson does not propose to discuss this wider debate in this Consultation Paper, since it<br />
ranges well beyond the insurance contract area. Nonetheless, the <strong>Commission</strong> notes that the Financial<br />
Regulator has, since 2009, adopted a more robust ―principles and rules‖ approach to regulation. Similarly, the<br />
reorganisation of the general regulatory system, evidenced by the enactment of the Central Bank <strong>Reform</strong> Act<br />
2010 (and further planned legislation), suggests that this more robust approach will contuinue for the<br />
foreseeable future. Indeed on the 16 Dec 2011 the Central Bank issued its largest fine to date against the<br />
Combined <strong>Insurance</strong> Company of Europe for ―the gavest and most persistent‖ breaches of the regulatory<br />
requirements contained in the 2006 Consumer Protection Code. See, “<strong>Insurance</strong> Firm fined €3.35 m for 28<br />
breaches of regulations‖, Irish Times, 20 Dec 2011<br />
3
has been the Consumer Protection Code 2012, 14 which sets out enforceable standards for financial<br />
services contracts, including insurance contracts, and which in many respects amount to a statutory<br />
statement of key contractual obligations. Along with these statutory innovations, voluntary Codes of<br />
Practice have also been developed by representative bodies suich as the Irish <strong>Insurance</strong> Federation (IIF),<br />
and the <strong>Commission</strong> considers that these have further potential.<br />
10. The establishment, in parallel, of the FSO has had equally signficant effects, because the FSO<br />
has considerable decision-making powers to resolve consumer disputes as well as those involving small<br />
and medium sized undertakings (SMEs). The establishment of the FSO indicated the need for a<br />
decision-making process to resolve disputes that would be less expensive than litigation. The FSO has<br />
the additional advantage that the Office can engage in mediation of disputes and, even when engaged in<br />
decision-making, can make determinations that depart from the precise requirements of the principles<br />
and rules of individual insurance contact law. This statutory discretion appears to reflect the view that<br />
these principles and rules may not reflect an appropriate calibration between the respective obligations<br />
and rights of the insured and the insurer. The <strong>Commission</strong> notes, nonetheless, that the published<br />
decisions of the FSO indicate that, in many instances, the existing principles and rules have played a<br />
significant part in these processes.<br />
I<br />
The development of Principles of European <strong>Insurance</strong> Contract <strong>Law</strong> (PEICL)<br />
11. Another significant influence, certainly in terms of individual insurance contract law, has been the<br />
publication of the Principles of European <strong>Insurance</strong> Contract <strong>Law</strong> (PEICL), the outcome of a collaborative<br />
project between leading European experts in this area. The publication of PEICL mirrors comparable<br />
projects in other jurisdictions to set out key principles of the law, such as the Restatements of <strong>Law</strong><br />
published by the American <strong>Law</strong> Institute (ALI). It remains to be seen whether the PEICL will have<br />
anything like the same influence on the development of law in EU member states as the ALI<br />
Restatements have had in the United States. In any event, from the <strong>Commission</strong>‘s perspective, the<br />
publication of PEICL provides another reference point for this current review of insurance contract law.<br />
J<br />
The <strong>Commission</strong>’s General Approach in this Consultation Paper<br />
12. The <strong>Commission</strong> considers that a review of insurance contract law in the early 21 st century<br />
should have regard to all these developments. This allows the <strong>Commission</strong> to consider afresh longestablished<br />
principles and rules in this area, in particular those based on principles of private autonomy<br />
and which were developed before the advent of statutory regulation. The regulatory landscape,<br />
evidenced by the Consumer Protection Code 2012, has a much more interventionist character in relation<br />
to contractual practices than was previously the case, or perhaps is even generally appreciated.<br />
Furthermore, the advent of the FSO has produced a body of norms and standards that indicate the need<br />
for a fundamental reappraisal of Irish insurance contract law.<br />
13. In approaching this Consultation Paper, therefore, the <strong>Commission</strong> considers that while existing<br />
common law principles and rules may be in some need of recalibrtation, a number of underlying key<br />
elements remain valid. The <strong>Commission</strong> is conscious that the existing law in this area includes longestablished<br />
common law principles whose origins coincide with the still-extant Life Assurance Act 1774.<br />
It is equally conscious that the more recent case law in this area, and the recent legislation that<br />
established the Financial Regulator and the FSO, provide an important contemporary background against<br />
which propsoals for reform need to be considered. The <strong>Commission</strong> is also conscious that any proposals<br />
14<br />
The Consumer Protection Code 2012 (which was published in October 2011 after a significant public<br />
consultation process and is in force from 1 January 2012) is more detailed than the previous Consumer<br />
Protection Code published in 2006. This reflects the more robust ―principles and rules‖ approach to regulation<br />
mentioned in the previous footnote. The Code was issued under the following statutory powers: (a) section<br />
117 of the Central Bank Act 1989; (b) sections 23 and 37 of the Investment Intermediaries Act 1995; (c)<br />
section 8H of the Consumer Credit Act 1995; and (d) section 61 of the <strong>Insurance</strong> Act 1989. The Consumer<br />
Protection Code 2012 is available at http://www.centralbank.ie/regulation/processes/consumer-protectioncode/Documents/Consumer%20Protection%20Code%202012.pdf.<br />
4
should take account of the EU setting, including proposals for the future development of insurance<br />
contract law at European level such as those indicated by the publication of the Principles of European<br />
<strong>Insurance</strong> Contract <strong>Law</strong> (PEICL).<br />
14. In addition, as with its other law reform projects, the Commisison has also had the advantage of<br />
reviewing comparable developments in insurance contract law in a number of other jurisdictions, including<br />
proposals for reform and enacted reforms in Australia, Canada and the United Kingdom. In this respect,<br />
the <strong>Commission</strong> is also fully conscious of the importance of insurance as a financial service in Ireland,<br />
that it does not operate in isolation, and that it is closely connected with leading centres of insurance<br />
(such as London) as well as the increasingly globalised market for financial services.<br />
15. The <strong>Commission</strong> now turns to outline the contents of the Consultation Paper.<br />
A<br />
Outline of Consultation Paper<br />
16. In Chapter 1 (Regulatory Context), the <strong>Commission</strong> examines some detailed aspects of the<br />
current regulatory regime. The <strong>Commission</strong> acknowledges that the activities of existing non-statutory and<br />
statutory bodies have already had a significant impact on insurance contractual practice. The decisions<br />
of the FSO have also produced a body of principles, often informed by custom and practice within the<br />
industry as well as court decisions, that have led to more balanced outcomes in individual disputes.<br />
These developments are reflected in both the IIF voluntary Codes of Practice and the Financial<br />
Regulator‘s statutory Consumer Protection Code 2012, which the <strong>Commission</strong> notes applies, at least in<br />
part, not just to insurance taken out by consumers but also by commercial undertakings.<br />
17. It is clear to the <strong>Commission</strong> that Codes of Practice can play a valuable role in resolving<br />
individual disputes. The <strong>Commission</strong> therefore concludes that regulatory bodies (in particular the<br />
Financial Regulator and the National Consumer Agency) should continue to liaise with each other in order<br />
to develop comprehensive statutory Codes of Practice setting out standards of best practice, building on<br />
the best practice standards developed by the Irish <strong>Insurance</strong> Federation and on the statutory model of the<br />
Financial Regulator‘s Consumer Protection Code 2012.<br />
18. The <strong>Commission</strong> also provisionally recommends that legislation should provide that in any<br />
litigation or other dispute resolution process such statutory Codes of Practice setting out standards of<br />
best practice should be admissible in evidence; and that, if any provision of such Code is relevant to a<br />
question arising in the litigation or other dispute resolution process, the provision may be taken into<br />
account in determining that question, but that this would be without prejudice to the substantive rights<br />
between the parties. In addition, the legislative framework being proposed in this Consultation Paper<br />
should, in general, apply to consumers as defined for the purposes of the jurisdiction of the Financial<br />
Services Ombudsman (FSO), namely natural persons and businesses with an annual turnover not<br />
exceeding €3 million.<br />
19. In Chapter 2 (Insurable Interest), the <strong>Commission</strong> notes that although Irish common law did not<br />
require an insurable interest to be present for a contract of insurance to be enforceable, subsequent<br />
statutory developments aimed at counteracting fraud, gambling and criminal destruction of lives and<br />
property did. Pre-1922 legislation was largely ineffective or unclear on the insurable interest question but<br />
it is clear that in relation to life policies Irish law retains an insurable interest requirement by way of the<br />
Life Assurance Act 1774. However, in relation to non indemnity insurance, there is significant judicial<br />
authority for the view that the 1774 Act does not apply to property insurance. The <strong>Commission</strong> sees no<br />
case for the introduction of an insurable interest requirement where no such requirement currently exists.<br />
In cases of indemnity insurance the need for an insured to show a loss, and the indemnity principle,<br />
achieve the same net result as the insurable interest requirement.<br />
20. In terms of reform, the <strong>Commission</strong> provisionally recommends that legislation should provide that<br />
an otherwise valid insurance claim cannot be rejected by the insurer solely because the insured lacks an<br />
insurable interest as it has been traditionally defined, that is, a legal or equitable relationship between the<br />
insured and the subject matter of the insurance contract. The <strong>Commission</strong> provisionally recommends<br />
that, instead, insurable interest should, in the interests of certainty, be defined in legislation (to reflect<br />
current Irish case law) as an interest that subsists when a person may benefit from the continued<br />
existence or safekeeping of the subject matter of the insurance or may be prejudiced by its loss; and that<br />
5
this definition would apply both to non-life insurance (in particular property and liability insurance) and to<br />
life insurance. In connection with life policies, the <strong>Commission</strong> also recommends reform of the ―natural<br />
love and affection‖ category of insurable interest insurable interest requirement to include civil<br />
partnership, cohabition and other familial relationships. This adjustment would also result in the repeal of<br />
the Life Assurance Act 1774. Finally, although the insurable interest requirement is not an essential<br />
element in defining insurance for regulatory purposes, the <strong>Commission</strong> considers it an important<br />
benchmark in assisting regulation of financial services, gaming and wagering. The <strong>Commission</strong><br />
recommends that further regulatory steps be taken to distinguish insurance contracts from other financial<br />
or investment activities associated with risk.<br />
21. In Chapter 3 (Duty of Disclosure), the <strong>Commission</strong> notes that the duty of disclosure is<br />
mandated by both the common law and the Marine <strong>Insurance</strong> Act 1906 as being applicable to all<br />
insurance contracts. The duty is rooted in ―special knowledge‖ of a risk as being likely to be solely in the<br />
possession of the proposer. Whether this remains the case is open to some doubt in the light of<br />
telecommunications and other advances. The duty has always been balanced by reference to the<br />
insurer‘s duty to disclose and investigate circumstances within the insurer‘s competence and expertise.<br />
In some jurisdictions the duty of disclosure has been offset or indeed removed altogether by an insurer‘s<br />
obligation to ask specific questions.<br />
22. The <strong>Commission</strong> provisionally recommends that the pre-contractual duty of disclosure in<br />
insurance contract law should be retained, but that it should (in accordance with authoritative case law in<br />
Ireland) be restricted to facts or circumstances of which the person applying for insurance cover – the<br />
proposer – has actual knowledge; and that the duty of disclosure would not, therefore, extend to every<br />
fact or circumstance which ought to be known by him or her (constructive knowledge). The <strong>Commission</strong><br />
provisionally recommends that this modified pre-contractual duty of disclosure should apply to all<br />
insurance, other than Marine, Aviation and Transport (MAT) insurance, which would continue to be<br />
regulated in this respect by the Marine <strong>Insurance</strong> Act 1906.<br />
23. The <strong>Commission</strong> also recommends that legislation should continue to provide that, because the<br />
proposer possesses more relevant information than the insurer, the pre-contactual duty of disclosure<br />
should continue to be the basis on which a contract of insurance is a contract of utmost good faith<br />
(uberrimae fidei). The <strong>Commission</strong> also provisionally recommends that the insurer should be under a<br />
statutory duty to explain to a proposer both the nature of the duty of disclosure and the consequences of<br />
non-disclosure.<br />
24. In Chapter 4 (Pre-contractual Misrepresentation and <strong>Insurance</strong> <strong>Contracts</strong>), the <strong>Commission</strong><br />
discusses the duty in section 20 of the Marine <strong>Insurance</strong> Act 1906 to give ―true‖ answers, and<br />
provisionally concludes that this should be replaced by a duty to answer specific questions honestly and<br />
carefully. This would apply to consumer insurance and mass market insurance products (including mass<br />
market insurance products to all businesses, not limited to the jurisdictional limit of the Financial Services<br />
Ombudsman). The <strong>Commission</strong> also considers that the insurer must ensure that any question posed in<br />
writing to the proposer is drafted in plain, intelligible language; that any such question should be specific<br />
as to the information being sought by the insurer; and that where there is doubt about the meaning of a<br />
question, it should be interpreted by reference to a standard of what is fair and reasonable.<br />
25. The Commisison also suggests that the misrepresentation provisions in the Sale of Goods and<br />
Supply of Services Act 1980 could be modified so as to reflect the needs of the insurance contract. The<br />
<strong>Commission</strong> also provisionally recommends that rescission of a contract of insurance for non fraudulent<br />
misrepresentation should no longer be the primary remedy. This reflects in practice what Irish courts and<br />
the FSO have been doing in recent years.<br />
26. The <strong>Commission</strong> accepts that questions asked by an insurer should be answered, but that the<br />
failure of an insurer to follow up on an obviously incomplete answer should be regarded as a waiver of the<br />
duty of disclosure in appropriate cases. This would involve the adoption of section 27 of the Australian<br />
<strong>Insurance</strong> <strong>Contracts</strong> Act 1984.<br />
27. In Chapter 5 (Warranties), the <strong>Commission</strong> acknowledges that contractual warranties may, in a<br />
passive sense, be unobjectionable because the warranty may help to identify or define the risk being<br />
underwritten. Warranties may also, however, act as ―traps for the unwary‖, giving insurers wide-ranging<br />
6
grounds for avoiding a policy. The <strong>Commission</strong> recommends a number of measures to deal with abusive<br />
provisions of this kind. The <strong>Commission</strong> provisionally recommends that the entitlement of an insurer to<br />
avoid a policy or a claim for breach of warranty should depend on whether the insured was provided at<br />
the pre-contractual stage, or contemporaneously with the conclusion of the contract, with the information<br />
required by the duty of disclosure (as already defined in this Consultation Paper).<br />
28. The <strong>Commission</strong> also provisionally recommends that, in respect of promissory or continuing<br />
warranties that arise after the contract has been agreed, the insurer must provide the proposer with a<br />
clear statement prior to the formation of the contract about the scope of the continuing obligations<br />
imposed upon the proposer when he or she becomes insured. The <strong>Commission</strong> also concludes that<br />
statements of fact or opinion shall not be converted into a contractual warranty by anything stated in the<br />
contract. This means that ―basis of contract‖ clauses will cease to be effective through the law of contract,<br />
the insurer‘s remedies being available in tort or under specific legislation. This recommendation is in line<br />
with best practice standards in the industry.<br />
29. The <strong>Commission</strong> also provisionally recommends that, if the insured can show that there was no<br />
causal link between the failure to observe a promissory warranty and the loss, the insured should be able<br />
to recover on the claim. The New Zealand approach to this difficult issue provides a significant<br />
improvement to existing Irish law and the <strong>Commission</strong> provisionally recommends the adoption of the<br />
approach that has been in place there since 1977.<br />
30. In Chapter 6 (Exclusions and Unfair Terms), the <strong>Commission</strong> notes that existing judicial<br />
approaches to unusual terms, in both consumer and commercial contracts, require the party who drafted<br />
such terms to draw attention to them. Legislation such as the Consumer Protection Act 2007 also gives<br />
additional protection to consumers, but Irish law does not have specific protection for businesses<br />
contracting on another‘s standard terms. The <strong>Commission</strong> accordingly recommends that there should be<br />
a general statutory duty on an insurer to draw attention to unusual terms. The <strong>Commission</strong> also<br />
provisionally recommends that a good faith provision, based on section 14 of the Australian <strong>Insurance</strong><br />
<strong>Contracts</strong> Act 1984, should be enacted. The Australian provision is an updated version of section 17 of<br />
the Marine <strong>Insurance</strong> Act 1906, with the specific focus being drawn to instances of unfairness at the time<br />
of conclusion of the contract. This reform would provide greater transparency and accountability in<br />
contractual negotiations.<br />
31. The <strong>Commission</strong> also provisionally recommends that Regulation 4 of the Unfair Terms in<br />
Consumer <strong>Contracts</strong> Regulations 1995 (which deals with specific circumstances in which a contract term<br />
shall not of itself be considered to be unfair) should be clarified in the context of insurance contracts so<br />
that it is provided, to avoid any doubt, that: (a) a term in an insurance contract shall not in itself be<br />
regarded as unfair where the subject matter of the term has actually been considered by the insurer in the<br />
calculation of the premium (price); (b) that this has been drawn to the attention of the proposer; and (c)<br />
that this clarification to Regulation 4 should apply to consumers as defined for the purposes of the<br />
jurisdiction of the Financial Services Ombudsman, namely natural persons and businesses with an<br />
annual turnover not exceeding €3 million. This reform would be in line with the suggestions in Article<br />
2:304 of the Principles of European <strong>Insurance</strong> Contract <strong>Law</strong> (PEICL) and, in turn, reflects insurance<br />
legislation in a number of other EU states (including Germany).<br />
32. In Chapter 7 (Formalities), the <strong>Commission</strong> examines contractual formalities, but is conscious in<br />
this respect that the regulatory bodies have issued specific requirements to insurance companies, often<br />
on foot of EU or other statutory compliance provisions. The <strong>Commission</strong>‘s recommendations should be<br />
seen in this context.<br />
33. On the general question of the need for an insurance contract to be in writing, the <strong>Commission</strong><br />
provisionally recommends that this should not be a necessary pre-condition to the validity of an insurance<br />
contract. The <strong>Commission</strong> is also aware that many insurance contracts are the subject of extensive<br />
requirements of notice and form under EU law. The <strong>Commission</strong> concludes that these requirements<br />
should be consolidated and set out in primary legislation, using the requirements in the European<br />
Communities (Distance Marketing of Consumer Financial Services) Regulations 2004 as a model.<br />
34. The <strong>Commission</strong> also provisionally recommends that legislation should include a statutory duty<br />
on insurers to provide a proposer with the prescribed requirements of notices, notification and forms. The<br />
7
<strong>Commission</strong> provisionally recommends that, subject to a cooling-off period (if any), the insurer should<br />
transmit the insurance policy document to the insured within 15 working days of the contract being<br />
agreed.<br />
35. In Chapter 8 (The Duty of Utmost Good Faith: Post-Contractual Aspects), having reviewed<br />
the case law concerning a suggested post-contractual duty of utmost good faith, the <strong>Commission</strong><br />
concludes that there is very little support for the existence of any expansive duty of this kind. The<br />
<strong>Commission</strong> provisionally recommends, therefore, that legislation should set out the mutual duties on the<br />
insured and the insurer in respect of claims handling, so that the principle of good faith would then remain<br />
relevant only to pre-contractual formation of the contract, as discussed in Chapter 3, above.<br />
36. The <strong>Commission</strong> also provisionally recommends that the law should continue to provide that an<br />
insured should be prohibited from recovering on a claim by submitting a fraudulent claim or fraudulent<br />
evidence to support a claim; but that it should also provide that an innocent co-insured or beneficiary may<br />
recover on a proportionate basis; provided that the fraudulent insured cannot benefit from the policy.<br />
37. In Chapter 9 (Third Party Rights), the <strong>Commission</strong> concludes that in the context of third party<br />
rights in insurance contracts, it would, in general, be sufficient to protect such rights if the Oireachtas<br />
enacted legislation based on the draft Contract <strong>Law</strong> (Privity of Contract and Third Party Rights) Bill in the<br />
<strong>Commission</strong>‘s 2008 Report on Privity of Contract and Third Party Rights. In addition, the <strong>Commission</strong><br />
invites submissions as to whether additional specific provisions should be enacted in the context of the<br />
operation of insurance contracts in specific settings, for example, in insolvency, on the death of an<br />
insured person and during the completion of a contract for the conveyance of land.<br />
38. The <strong>Commission</strong> also provisionally recommends that section 62 of the Civil Liability Act 1961<br />
should be extended to allow a third party to proceed against the insurer where the insured cannot be<br />
located; this would reflect the approach in section 51 of the Australian <strong>Insurance</strong> <strong>Contracts</strong> Act 1984.<br />
39. In Chapter 10 (Remedies), the <strong>Commission</strong> considers that, under current law, there is an<br />
excessive emphasis on repudiation of liability under an insurance policy as a remedy for the insurer. The<br />
<strong>Commission</strong> has, accordingly, provisionally concluded that repudiation should no longer be the main<br />
remedy, and that in cases of non-disclosure and misrepresentation the principal remedy should be one of<br />
damages in proportion to the failure by the insured.<br />
40. The <strong>Commission</strong> also provisionally recommends that any damages awarded to an insured arising<br />
from the insurer‘s failure to comply with the proposed post-contractual duties of the insurer (set out in<br />
Chapter 8) should reflect: (a) general principles of damages in contract law, namely whether the loss is a<br />
reasonably foreseeable consequence of the breach of contract (and in particular, damages that are<br />
reasonably foreseeable from a refusal in bad faith to meet a valid claim); and (b) emerging principles of<br />
restitution.<br />
41. The <strong>Commission</strong> also provisionally recommends that legislation should provide that subrogation<br />
rights should be limited in two situations: (a) claims between family members and (b) the employeremployee<br />
relationship. The <strong>Commission</strong> invites submissions as to the precise form these restrictions<br />
should take.<br />
42. Chapter 11 contains a summary of the provisional recommendations made in this Consultation<br />
Paper.<br />
43. This Consultation Paper is intended to form the basis of discussion and therefore all the<br />
recommendations are provisional in nature. The <strong>Commission</strong> will make its final recommendations on the<br />
subject of insurance contract law following further consideration of the issues and consultation.<br />
Submissions on the provisional recommendations included in this Consultation Paper are welcome. To<br />
enable the <strong>Commission</strong> to proceed with the preparation of the Report, which will contain the<br />
<strong>Commission</strong>‘s final recommendations in this area, those who wish to do so are requested to make their<br />
submissions in writing to the <strong>Commission</strong> or by email to info@lawreform.ie by 31 March 2012.<br />
8
CHAPTER 1<br />
REGULATORY CONTEXT<br />
A<br />
Introduction<br />
1.01 In this Chapter the <strong>Commission</strong> examines some detailed aspects of the current regulatory<br />
regime, with a focus on four matters in particular. In Part B, the <strong>Commission</strong> dsicusses overlapping<br />
regulation of Irish insurance contract law and commercial practices. In Part C the <strong>Commission</strong> examines<br />
European Union initiatives on insurance regulation and the related development of the Principles of<br />
European <strong>Insurance</strong> Contract <strong>Law</strong> (PEICL). In Part D, the <strong>Commission</strong> discusses new legal norms and<br />
forms of Dispute Resolution, in partyocular those arising from the role of the Financial Services<br />
Ombudsman (FSO). In Part E, the <strong>Commission</strong> discusses the need for insurance contract law reform.<br />
Agaisnt this background, in Part F the <strong>Commission</strong> sets out its conclusions and provisional<br />
recommendations for reform, acknowledging that the activities of existing non-statutory and statutory<br />
bodies have already had a significant impact on insurance contractual practice. The decisions of the FSO<br />
have also produced a body of principles, often informed by custom and practice within the industry as well<br />
as court decisions, that have led to more balanced outcomes in individual disputes. These developments<br />
are reflected in both the IIF voluntary Codes of Practice and the Financial Regulator‘s statutory Consumer<br />
Protection Code 2012, which the <strong>Commission</strong> notes applies, at least in part, not just to insurance taken<br />
out by consumers but also by commercial undertakings.<br />
B<br />
Overlapping regulation of Irish insurance contract law and commercial practices<br />
(1) Regulatory overlaps – financial services legislation<br />
1.02 The most important regulatory agency that has a significant impact upon the law relating to<br />
insurance contracts is the Financial Services Ombudsman (FSO) insofar as the FSO has a broad<br />
jurisdiction to investigate complaints about the conduct of a regulated financial service provider in relation<br />
to the provision of, or an offer to provide, or a failure to provide, a financial service. 1 The creation of a<br />
Financial Regulator was a core recommendation of the 1999 Implementation Advisory Group on the<br />
Establishment of a Single Regulatory Authority for the Financial Services Sector, 2 the McDowell Report.<br />
The McDowell Report also recommended the creation of a statutory Financial Services Ombudsman to<br />
replace the non-statutory Ombudsman schemes.<br />
1.03 While the Statutory Financial Services Ombudsman model of alternative dispute resolution is<br />
the most obvious regulatory agency, there are other statutory bodies that have significant roles to play in<br />
the way in which the insurance industry conducts business in Ireland. Some of these agencies have the<br />
power to regulate information gathering practices and the way in which insurance contracts can be<br />
structured, so it is no longer possible to see the process of negotiating an Irish insurance policy as being<br />
predominantly governed by principles of private autonomy and freedom of contract.<br />
(2) Regulatory Overlaps – Competition <strong>Law</strong><br />
1.04 Competition law principles and objectives such as the desire to regulate levels of market<br />
concentration, facilitation of the ability of new suppliers to enter into the Irish insurance market (and thus<br />
avoid anti-competitive levels of market power in both the insurance and intermediary markets) have an<br />
important part to play in Irish economic life. Competition law may also ensure that insurance companies<br />
do not share or aggregate pricing data in ways that undermine consumers. The Competition Authority<br />
has undertaken a number of studies on the Irish insurance landscape, the most noteworthy being the<br />
1<br />
2<br />
Under Part VIIB of the Central Bank Act 1942, as inserted by the Central Bank and Financial Services<br />
Authority of Ireland Act 2004.<br />
PN. 7271 (1999).<br />
9
2005 Final Report and Recommendations, Competition Issues in the Non-Life <strong>Insurance</strong> Market. After<br />
investigating motor insurance, employer‘s liability insurance and public liability insurance, the Competition<br />
Authority made a number of recommendations aimed at improving competitiveness within each sector.<br />
Some recommendations involved providing proposers and insureds with contractual rights to a statement<br />
on claims history, timely and detailed renewal notices so as to facilitate switching to competitors; other<br />
recommendations such as a requirement that intermediary fees should be disclosed to insureds have<br />
been subsequently diluted so as to avoid ―consumer information overload.‖ The Competition Authority, in<br />
its 2009 Annual Report, noted that the Financial Regulator requires such disclosure of intermediary fees if<br />
the consumer makes a request for such information. The Competition Authority clearly has an important<br />
role to play in improving the rights of Irish consumers by promoting competition and making<br />
recommendations to the Financial Regulator. Other State agencies are also expected to respond to the<br />
views expressed by the Competition Authority. 3<br />
(3) Regulatory Overlaps - Equality Legislation<br />
1.05 The provisions of the the Employment Equality Acts 1998 and 2004 and the Equal Status Acts<br />
2000 and 2004 clearly have an impact upon the <strong>Insurance</strong> Industry. Both pieces of legislation prohibit<br />
discrimination based upon<br />
gender<br />
marital status<br />
family status<br />
sexual orientation<br />
religion<br />
age<br />
disability<br />
race<br />
membership of the traveller community status.<br />
1.06 While most of the complaints made to the Equality Authority relate to discrimination in the<br />
provision of public sector services, and in particular discrimination based on race, gender and traveller<br />
status, there are pertinent examples involving insurance.<br />
1.07 For example, Brother Anthony White 4 was able to use the services of the Equality Authority to<br />
challenge a practice of loading a surcharge onto the cost of hiring a motor vehicle because the driver was<br />
aged over 70, no account being taken of the individual circumstance of the driver. The service provider<br />
agreed to withdraw this automatic loading. The then chief executive of the Authority was quoted on the<br />
Authority‘s website as remarking:<br />
―the use of lower and upper age limits to govern access to insurance products and financial and<br />
other services is a widespread problem. Age limits exclude people without any consideration of<br />
their individual circumstances‖<br />
1.08 There are decisions of Equality Officers that also address disability issues. In Mr A v A Life<br />
Assurance Company 5 the Equality Officer found that a refusal to top up an income protection policy for an<br />
insured with diabetes was a prima facie case of disability discrimination. The insurer however was able to<br />
3<br />
4<br />
5<br />
For example, the 2007 Report on Private Health <strong>Insurance</strong> contained recommendations that the Competition<br />
Authority said had been either fully implemented or written into draft legislation: 2009 Annual Report, p.48.<br />
www.equalitytribunal.ie. See also, ―Pensioners in Search of Travel <strong>Insurance</strong>,‖ The Irish Times, 2 May 2011.<br />
Equality Decision DEC-S2011.008 (18 February 2011). See also, O‟Donoghue v Hibernian General <strong>Insurance</strong><br />
(2004) and Ross v Royal Sun Alliance (2003) cited in Mr A v A Life Assurance Company. See generally<br />
Smith, Disability Discrimination <strong>Law</strong> (Thomson Reuters, 2010).<br />
10
come within the exemption provide by section 5(2)(d) of the Equal Status Act 2000, that is, the decision<br />
not to extend cover was reasonable having regard to underwriting and commercial factors.<br />
1.09 In the more general context of discrimination, complaints brought against bodies that exist<br />
outside the public sector have been lodged. The press release accompanying the 2006 Annual Report of<br />
the Equality Authority stated that:<br />
―Access to education (57 casefiles), access to accommodation (41 casefiles), access to<br />
insurance (17 casefiles) and access to banking and financial services (15 casefiles) are the<br />
main issues raised under the Equal Status Acts after public sector services.‖<br />
1.10 The database of decisions reached by the Equality Tribunal shows that a number of complaints<br />
have been made in relation to the charging of differential premiums, most decisions being arrived at on<br />
factual grounds such as whether the loading was based upon actuarial modelling or statistical data. 6<br />
Complaints about discrimination in relation to preferential premiums and gender or marital status have<br />
also been upheld by the Equality Tribunal.<br />
(4) Regulatory Overlaps - The Data Protection <strong>Commission</strong>er<br />
1.11 The constraints that data protection and privacy considerations place upon the proposer and<br />
the insurer also contribute to undermining the traditional view that ―the proposer knows everything and the<br />
insurer nothing.‖ Far from requiring the proposer to disclose anything that the proposer knows or is<br />
deemed to know concerning the risk, contemporary privacy principles and rules on data protection may<br />
impose obligations to withhold personal data about third parties who have not explicitly consented to<br />
disclosure. Similarly, the idea that an insurer may be free to either use or ignore information provided, for<br />
any particular purpose, may not accord with data privacy rules. This conflict between data protection<br />
principles, and pre-contractual and post-contractual data capture and use practices, has not been widely<br />
appreciated: it is nevertheless a cause of some uncertainty in relation to the approach to be adopted by<br />
proposers and insurers to information gathering.<br />
1.12 The data protection principles consist of 8 guideline rules that must be followed by any data<br />
controller engaged in the collection and use of personal data, whether that data is recorded on paper or<br />
some other format, for example, electronically. The 8 rules require a data controller to<br />
(1) obtain and process information fairly;<br />
(2) keep information only for one or more specified, explicit and lawful purposes;<br />
(3) use and disclose the information only in ways compatible with those purposes;<br />
(4) keep the information safe and secure;<br />
(5) keep the information accurate, complete and up-to-date;<br />
(6) ensure the information is adequate, relevant and not excessive;<br />
(7) retain the information for no longer than is necessary for those purposes;<br />
(8) give the individual data subject a copy of their personal data, on request.<br />
1.13 Within the specific context of the insurance sector there are a number of instances where Irish<br />
data protection law may inform pre-contractual information gathering practices. For example, there are<br />
specific rules in place when personal data is collected from a data subject following on from a medical<br />
examination. The Data Protection (Access Modification) (Health) Regulations 1989 (SI No 82 of 1989)<br />
provide that, even if the data subject requests a copy of this personal data under rule 8 above, the<br />
relevant health professional investigating or treating the data subject is entitled to withhold the personal<br />
data in the event that such a professional forms the view that disclosure would be harmful to the data<br />
subject/patient. It may be that considerations of this kind were behind the decisions of the clinicians<br />
treating Ms Coleman in Coleman v New Ireland <strong>Insurance</strong> Plc. 7 While the decision reached by Clarke J<br />
6<br />
7<br />
King v Voluntary Health Iinsurance, DEC-S2008-116, and Geoffrey O‟Donoghue v Hibernian (2004), at<br />
www.equalitytribunal.ie.<br />
[2009] IEHC 273. Here a young woman was not advised by clinicians that her sight difficulties might be early<br />
indications that multiple sclerosis would develop in later life; this turned out to be the case. The High Court<br />
decided that there had been no non-disclosure or misrepresentation that would have justified repudiating an<br />
income protection policy.<br />
11
in Coleman accords with data protection law, there are other situations where the ‗disconnects‘ between<br />
privacy considerations and contract law are more evident.<br />
1.14 Take the possible dilemma facing Mrs Lambert in the English case Lambert v Co-operative<br />
<strong>Insurance</strong> 8 . While on the facts of Lambert the issue of disclosure did not arise because Mrs Lambert did<br />
not consider it relevant, the point is this: should the disclosure be made, even if the personal data relates<br />
to a third party? Data protection law, especially rules 1 to 4, are probably relevant but, at an intuitive<br />
level, one could be excused for seeing the privacy consideration as being somewhat artificial.<br />
Nevertheless, it is possible to envisage cases where a previous conviction would not be disclosed, on<br />
privacy grounds, the effect being that the insurance policy might be avoided. While a Spent Convcitions<br />
Act 9 might answer this situation, the same may not be true of other sensitive personal data material such<br />
as health conditions or sexual history. The leading English decision on this is undoubtedly Horne v<br />
Poland, 10 in which an insurer was able to avoid payment on a burglary insurance policy on the basis that<br />
the proposer had failed to declare that he was born in Romania and had lived there until his teens,<br />
matters of importance to an underwriter assessing risk apparently.<br />
1.15 The decisions of the Data Protection <strong>Commission</strong>er also demonstrate how the data protection<br />
principles may cut across insurance contract law. Case Study 2 of 1999 for example 11 illustrates the fact<br />
that breach of any implied contractual duty of confidence in relation to personal data will also constitute a<br />
breach of the security principle (rule 4 above). Case Study 1 of 2001 also censored an insurer that<br />
collected irrelevant data on the marital status of a person seeking motor insurance, 12 and Case Study 8 of<br />
2009 also drew attention to an insurer collating excessive information on penalty points imposed on<br />
drivers. There are also situations where the sharing of personal data with trade bodies or other insurers<br />
may be problematical. Such practices were held by the Data Protection <strong>Commission</strong>er, in a decision<br />
relating to disclosure to the <strong>Insurance</strong> Industry Federation (IIF) of personal data on health insurance<br />
applicants, to be understandable from the insurer‘s perspective, but the <strong>Commission</strong>er felt that ―explicit<br />
consent‖ to disclosure of medical data should be the necessary standard, albeit at the cost of having any<br />
proposal declined or the contract avoided, should the proposer fail to make the disclosure. 13<br />
1.16 These matters have led the Data Protection <strong>Commission</strong>er, in consultation with the insurance<br />
industry, to formulate the Code of Practice on Data Protection for the <strong>Insurance</strong> Sector. Many of the<br />
requirements set by the code have a direct impact on data capture requirements and recalibrate the<br />
existing balance vis-à-vis the duty of disclosure, for example, further undermining the notion that the onus<br />
lies upon the proposer to volunteer information unprompted by the insurer.<br />
1.17 The fair obtaining and processing principle (rule 1) is said to require the insurer, on an<br />
application form, to, inter alia, advise the ―applicant‖ about the purpose of collecting the data, to whom it<br />
may be disclosed and any other relevant information necessary to ensure that all processing meets the<br />
requirements of fair processing. This obligation is reinforced by a requirement that insurers have a<br />
written privacy policy ―setting out clearly for what purposes personal data is processed‖, a privacy<br />
statement also being required for any insurer website. Rule 1 also has further implications should an<br />
insurance company as a matter of course seek personal data about an applicant from a third party, such<br />
8<br />
9<br />
10<br />
11<br />
12<br />
13<br />
[1975] 2 Lloyd‘s Rep. 485. In this case, the Court of Appeal ―reluctantly‖ held in favour of the insurer in the<br />
context of an policy for ―all risks,‖ because the proposer failed to reveal that her husband had been convicted<br />
of receiving stolen goods (McKenna J noting at p.191 that ―[s]he is not an underwriter‖).<br />
See <strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong>, Report on Spent Convictions (LRC 84-2007). The Government Legislaton<br />
Programme, Autumn Session 2011 (September 2011), available at www.taoiseach.ie, proposes to publish a<br />
Spent Convictions Bill in 2012. The issue is discussed further below.<br />
[1922] KB 364.<br />
Case studies are found in the Annual Reports of the Data Protection <strong>Commission</strong>er and can be found also at<br />
www.dataprivacy.ie.<br />
But see Dunn v Ocean Accident and Guarantee Corporation (1933) 45 Lloyd‘s Rep 276 where concealment of<br />
marital status was deemed concealment of a material fact.<br />
Case Study 13/2006.<br />
12
as another insurance company or a database. The documentation provided to the customer must refer to<br />
this practice. Clearly, any such reference could convey to a proposer the impression that information held<br />
on any database will become known to the insurer and may therefore constitute information that the<br />
insurer knows or ought to have known, thus abridging the proposer‘s duty of disclosure. Rule 1 will also<br />
complicate the process of obtaining sensitive personal data – this includes moral hazard issues such as<br />
criminal convictions, as well as medical data – because explicit consent to capture and use is the required<br />
standard.<br />
1.18 The use and disclosure principle (rule 3) similarly constrains an insurance company in relation<br />
to disclosure to other companies (as distinct from disclosure to the IIF): the Code states that disclosure<br />
may only be made to ―other insurance companies, where this is clearly stated on the application or claim<br />
form or in other correspondence with a claimant‖. Similar situations also arise in the context of rule 6<br />
which provides that an insurer who requests information about a proposer‘s family history may only use<br />
that information in order to underwrite the proposer‘s application. The information ―will not be used in<br />
underwriting the application of any third party who is related to the applicant‖. Clearly one might envisage<br />
cases where this principle could cause difficulties where members of the same family seek medical<br />
insurance from the same company at different times, and one applicant, perhaps not unreasonably,<br />
believes that the insurer has been put on notice about the family medical history. The Code also contains<br />
specific provisions that prohibit genetic testing, the prohibition being, in furtherance of s.42(2) of the<br />
Disability Act 2005; in particular the code provides that should an insurer acquire a genetic test result, the<br />
result ―must be ignored and not taken account of by the insurer in any way whatsoever. This applies both<br />
to positive and negative test results.‖<br />
1.19 The Code of Practice has not resolved all of the contentious data collection and processing<br />
issues that arise in relation to private insurance. Press Reports in recent months 14 relate to a number of<br />
instances in which personal data held by the Department of Social Protection has been wrongfully<br />
disclosed by a staff member to a private investigator who then in turn sold the data on to insurance<br />
companies and other financial institutions. This seems to be a straightforward example of unfair data<br />
collection. More difficult issues of law are raised by an industry database, <strong>Insurance</strong> Link. This database<br />
holds data relating to individuals who seek quotations for insurance, even if no cover or claim is obtained.<br />
Concerns about the retention of this data and third party access are under investigation by the Office of<br />
the Data Protection <strong>Commission</strong>er and some practices have been ruled illegal. 15<br />
(5) Regulatory Overlaps – Consumer Protection Agencies<br />
1.20 National consumer protection agencies have had a role to play in intervening on behalf of<br />
consumers for many years. Insurers are of course bound by general principles of contract and tort law<br />
and the corpus of Irish consumer protection legislation will apply to service providers, for example Part V<br />
of the Sale of Goods Act and Supply of Services Act 1980.<br />
1.21 In 2006, the last year in which the Office of the Director of Consumer Affairs was in existence,<br />
the Office received 43,142 queries or complaints, of which 1,500 involved the Financial/<strong>Insurance</strong><br />
sectors. 16 The National Consumer Agency does not provide statistics in this way but the 2008 Annual<br />
Report indicated that multi-year insurance plan cover for goods constitutes a source of numerous<br />
consumer complaints 17 and that insurance issues in relation to home construction and multi-unit<br />
accommodation are very much ―live‖ matters.<br />
1.22 However, the provisions of the Consumer Protection Act 2007, which implemented the 2005<br />
EU Unfair Commercial Practices Directive, 18 suggest that the National Consumer Agency (whose<br />
14<br />
15<br />
16<br />
17<br />
18<br />
―Social welfare probe over breaches‖ Irish Times December 20, 2010; ―Civil Servant investigated over sale of<br />
welfare data‖ Irish Independent April 6, 2011.<br />
‗Insurers breached data rules‘ Irish Times, April 27 2011. See Appendix 1, <strong>Insurance</strong> Link Investigation in the<br />
Data Protections <strong>Commission</strong>er‘s 2010 Annual Report at www.dataprivacy.ie.<br />
2006 Annual Report, available at www.consumerconnect.ie.<br />
Available at www.consumerconnect.ie.<br />
Directive 2005/29/EC: OJL 149, 11.6.2005.<br />
13
functions may in the future be merged into a new body incorporating the Competition Authority) will have<br />
a significant role to play in the resolution of consumer insurance complaints relating to general practices<br />
within the insurance industry. Recital 9 of the 2005 Directive provides that the directive is ―without<br />
prejudice to Community and national rules on contract law... [f]inancial services and immovable property,<br />
by reason of their complexity and inherent serious risks, necessitate detailed requirements, including<br />
positive obligations on traders. For this reason, in the field of financial services and immovable property,<br />
this directive is without prejudice to the right of Member States to go beyond its provisions to protect the<br />
economic interests of consumers‖. Article 3(9) of the Directive allows Member States to impose<br />
requirements that are either more restrictive or prescriptive than those found in the directive. The<br />
financial services that were brought within the remit of the Consumer Protection Act 2007 include services<br />
or facilities for insurance, and the 2007 Act goes on to prohibit unfair commercial practices, misleading<br />
commercial practices and aggressive commercial practices that are prejudicial to consumers.<br />
(6) Financial Services and consumers<br />
1.23 In introducing to the Oireachtas what became the Consumer Protection Act 2007 the then<br />
Minister for Enterprise, Trade and Employment said that its provisions ―add to all sectors of the economy<br />
and offer protection to consumers whether they are buying a loaf of bread or taking out a mortgage with<br />
the local bank‖. 19 As the Act went through the Oireachtas it was the subject of amendments to ensure<br />
that the jurisdiction to investigate complaints was vested in the Consumer Director of the Financial<br />
Services Authority, this being transferred to the Financial Services Ombudsman at a later date. Periodic<br />
reviews and investigations by the Financial Regulator into sectors of the insurance industry were seen as<br />
an important part of the role of the Financial Regulator as a consumer advocate. In June 2010<br />
investigations into home insurance centred on a few failures to process claim cheques within 10 business<br />
days. The Financial Regulator also questioned an increasingly standard practice whereby home<br />
insurance providers resort to using an ―approved builder‖ panel to effect home repairs. Both the Financial<br />
Regulator and the Consumers Association of Ireland questioned this practice vis-à-vis compliance with<br />
the Financial Regulator‘s 2006 Consumer Protection Code (since superceded by the Consumer<br />
Protection Code 2012), transparency requirements and competition law. Problems identified in relation<br />
to motor insurance included failures in relation to the statutory renewal timelines and inadequacy of<br />
renewal documentation.<br />
1.24 The Central Bank <strong>Reform</strong> Act 2010 has vested responsibility for banking and financial services<br />
regulation in the Central Bank of Ireland. The Central Bank thus replaces the three previous statutory<br />
agencies, the Central Bank, the Financial Services Authority of Ireland and the Financial Regulator. The<br />
directorate within the Central Bank of Ireland responsible for Financial Regulation has oversight over six<br />
divisions, two of them being insurance supervision and consumer protection. In 2011, the Consumer<br />
Protection Division released the findings of a Complaints Handling Inspection in <strong>Insurance</strong> Firms. 20 The<br />
inspection matched up the Consumer Protection Code and compliance levels attained within twelve<br />
insurance providers. Despite the prescriptive nature of the Code, high levels of non-compliance were<br />
found in regard to provision of initial point of contract data to the consumer, information on the Financial<br />
Services Ombudsman and rules requiring the acknowledgement of a complaint, in writing within five days<br />
of receipt of the complaint.<br />
(7) The Jurisdiction of the Financial Services Ombudsman<br />
1.25 The non-statutory <strong>Insurance</strong> Ombudsman of Ireland ADR Scheme, operative between 1992<br />
and 2004, was confined to complaints in which the proposer/insured acted ―in a private and personal<br />
capacity only‖. While the initial definition of ―consumer‖ in the Central Bank and Financial Services<br />
Authority of Ireland Act 2004 identified a consumer as a natural person not acting in the course of, or in<br />
connection with, carrying a business, the 2004 Act contained an enabling provision allowing the Financial<br />
Services Ombudsman Council to prescribe persons, or groups of persons to be designated as<br />
19<br />
20<br />
632 Dáil Debates Col. 1272. Note Professor Craig Brown‘s observation that ―in a sense all insurance law is<br />
about consumer protection‖, in Brown ―Private <strong>Insurance</strong> and Public Policy: Reconciling Conflicting Principles‖<br />
(2009) 47 CJBL 267 at 275<br />
Published on 19 April 2011.<br />
14
consumers. The Central Bank Act 1942 (Financial Services Ombudsman Council) Regulations 2005 (SI<br />
No. 190 of 2005) prescribe two classes of person:<br />
―(a) a person or group of persons, but not an incorporated body with an annual turnover<br />
in excess of 3 million euro. For the avoidance of doubt a group of persons includes<br />
partnerships and other unincorporated bodies such as clubs, charities and trusts, not<br />
consisting entirely of bodies corporate;<br />
(b) incorporated bodies having an annual turnover of 3 million euro or less in the financial<br />
year prior to the year in which the complaint is made to the Ombudsman (provided that<br />
such body shall not be a member of a group of companies having a combined turnover<br />
greater than the said 3 million euro).‖<br />
1.26 The 2005 Regulations also prescribe the maximum amount of compensation that the Financial<br />
Services Ombudsman may award: for insurance complaints this is set at €250,000.<br />
1.27 The creation of a statutory agency marked the end of the system of the ADR model of<br />
adjudication that the Irish <strong>Insurance</strong> Federation (IIF) had promoted through their sponsorship of the Office<br />
of the <strong>Insurance</strong> Ombudsman of Ireland. The terms of reference of the <strong>Insurance</strong> Ombudsman of Ireland,<br />
fixed by IIF in 1992, gave the <strong>Insurance</strong> Ombudsman the right to act as, ―counsellor, conciliator or<br />
adjudicator‖ in relation to ―complaints, disputes and claims.‖ The <strong>Insurance</strong> Ombudsman however did not<br />
have the right to entertain complaints other than those emanating from natural persons who took out<br />
insurance in a private and personal capacity only. The <strong>Insurance</strong> Ombudsman Scheme had a limitation<br />
on certain kinds of matter that could be entertained in a complaint such as a reference that ―relates to the<br />
rating or underwriting of a risk.‖ Furthermore, the <strong>Insurance</strong> Ombudsman was required, when<br />
adjudicating on the merits of a complaint to:<br />
―(a) exercise his discretion in a fair and reasonable manner;<br />
(b) have regard to the terms of the insurance contract, these Terms of Reference, all<br />
applicable rules of law and relevant judicial authority and general principles of good<br />
insurance practice.‖<br />
1.28 These requirements stand in sharp contrast to the considerations that attend the adjudication<br />
powers of the Financial Services Ombudsman. The parameters set by the IIF in these terms of reference<br />
were distinctly legalistic, tempered as they were by the requirement to exercise the discretion in a fair and<br />
reasonable manner and act by reference to general principles of good insurance practice. Nevertheless,<br />
the decisions of the <strong>Insurance</strong> Ombudsman of Ireland reflect the fact that, in practice, the <strong>Insurance</strong><br />
Ombudsman demonstrated a significant degree of independence. As the 1999 McDowell Report<br />
indicated, the Review Group was satisfied that the structure of the <strong>Insurance</strong> Ombudsman Scheme – a<br />
private company controlled by the Ombudsman Council interacting with the Department of Enterprise,<br />
Trade and Employment – was such as to guarantee the independence of the Scheme. Nevertheless, the<br />
Review Group opted for a ―one-stop shop‖ 21 statutory financial services ombudsman model rather than<br />
retention of the voluntary scheme.<br />
(8) Merger of the Industry ADR Scheme with the Statutory Model<br />
1.29 Although the <strong>Insurance</strong> Industry lobbied for the <strong>Insurance</strong> Ombudsman of Ireland ADR model<br />
to be retained, the Oireachtas ultimately decided to provide for a statutory complaints procedure under<br />
which a new entity, the Financial Services Ombudsman, would mediate, investigate and adjudicate upon<br />
a complaint made by an eligible consumer. A degree of continuity was provided in that ―the Financial<br />
Services Ombudsman shall have regard to the existing Terms of Reference of the <strong>Insurance</strong><br />
Ombudsman of Ireland for complaints regarding insurance‖, save when they have been superseded by<br />
the 2004 Act.<br />
1.30 Section 16 of the Central Bank and Financial Services Authority of Ireland Act 2004 amends<br />
the Central Bank Act 1942 by inserting a new Part VIIB into the 1942 Act. While these provisions contain<br />
21<br />
Report of the Implementation Advisory Group on the Establishment of a Single Regulatory Authority for the<br />
Financial Services Sector (1999), para. 4.12.<br />
15
estrictions on the ability of the Ombudsman to hear some complaints, the Ombudsman is directed ―as far<br />
as possible, [to] try to resolve the complaint by mediation‖ 22 The Ombudsman must, following<br />
investigation of a complaint, make a finding in writing (save where the complaint has been settled or<br />
withdrawn) that the complaint is substantiated, in whole or in part, or is not substantiated. Section 57<br />
CL(2) provides that:<br />
―(2) A complaint may be found to be substantiated or partly substantiated only on one or more<br />
of the following grounds:<br />
(a) the conduct complained of was contrary to law;<br />
(b) the conduct complained of was unreasonable, unjust, oppressive or improperly<br />
discriminatory in its application to the complainant;<br />
(c) although the conduct complained of was in accordance with a law or an established<br />
practice or regulatory standard, the law, practice or standard may be, unreasonable ,<br />
unjust or oppressive or improperly discriminatory in its application to the complainant;<br />
(d) the conduct complained of was based wholly or partly on an improper motive, an<br />
irrelevant ground or an irrelevant consideration;<br />
(e) the conduct complained of was based wholly or partly on a mistake of law or fact;<br />
(f) an explanation for the conduct complained of was not given when it should have<br />
been given;<br />
(g) the conduct complained of was otherwise improper.‖<br />
1.31 For present purposes the most noteworthy of these grounds is (c): the Financial Services<br />
Ombudsman may uphold a complaint, notwithstanding that the conduct was compliant with the law,<br />
established practice or a regulatory standard, because of the unreasonable, unjust, oppressive or<br />
improperly discriminatory impact that the law, practice or standard had on the individual complainant.<br />
1.32 There are signs that even the FSO complaints mechanism is becoming increasingly caught up<br />
in litigation. Applications for judicial review 23 and declarations that the Ombudsman has acted ultra vires<br />
his legislative powers 24 have become a feature of the regulatory landscape, undermining what<br />
MacMenamin J, in Hayes v Financial Services Ombudsman, 25 described as a legislative model which is<br />
―an informal expeditious and independent mechanism for the resolution of complaints. The respondent<br />
seeks to resolve issues affecting consumers. He is not engaged in resolving a contract law dispute in the<br />
manner in which a court would engage with the issues.‖ In contrast, Hogan J, in Koczan v Financial<br />
Services Ombudsman 26 seems to have viewed the task of the Financial Services Ombudsman as much<br />
more difficult than merely resolving contract disputes: the task ―runs well beyond that of the resolution of<br />
contract disputes in the manner traditionally performed by the courts… the Ombudsman must, utilising his<br />
or her specialist skill and expertise, resolve such complaints according to wider conceptions of et aegus<br />
22<br />
23<br />
24<br />
25<br />
26<br />
On the mediation requirement, see the discussion of J & E Davy v Financial Services Ombudsman [2008]<br />
IEHC 256, [2010] IESC 30 in the <strong>Commission</strong>‘s Report on Alternative Dispute Resolution: Mediation and<br />
Conciliation (LRC 98-2010).<br />
J & E Davy v Financial Services Ombudsman [2008] IEHC 256, [2010] IESC 30; Square Capital Ltd v<br />
Financial Services Ombudsman [2009] IEHC 407. See ―Serious errors in Ombudsman Ruling‖ The Irish<br />
Times, 19 November 2011.<br />
Quinn Direct v Financial Services Ombudsman [2007] IEHC 323, Caledonian Life v Financial Services<br />
Ombudsman [2010] IEHC 384.<br />
High Court, 3 November 2008.<br />
[2010] IEHC 407. For a decision in which the High Court effectively ruled on the duty of disclosure in<br />
insurance contract law see FBD <strong>Insurance</strong> plc v Financial Services Ombudsman [2011] IEHC 315.<br />
16
et bono which go beyond the traditional limitations of contract law.‖ The Supreme Court decision in<br />
Davy 27 does little to resolve this paradox.<br />
C<br />
European Union Initiatives on <strong>Insurance</strong> Regulation<br />
(1) Single Market for <strong>Insurance</strong><br />
1.33 The creation of a single European Market for insurance has been on the agenda of the<br />
European Union for nearly 50 years. In 1961 the European <strong>Commission</strong> document, General Programme<br />
on the abolition of restrictions on the freedom of establishment and the freedom to provide services 28 set<br />
as objectives the creation of a single European insurable market by way of the coordination of rules<br />
relative to the supervision of insurance companies and insurance contract law rules. An ambitious<br />
deadline was set for the end of 1969 but no progress was made on either front. The European<br />
<strong>Commission</strong> however succeeded in pushing through a number of directives that have progressively<br />
addressed the supervision and licensing issues. A full consideration of EU insurance regulation lies<br />
outside the scope of this Consultation Paper.<br />
1.34 The experience of the European <strong>Commission</strong> in setting out a harmonisation programme was<br />
not a happy one. While the General Programme in 1961 had argued that without harmonisation of<br />
insurance contract law a single market could not emerge, to the detriment of the insured and third party<br />
beneficiaries, the European <strong>Commission</strong> approached this topic in the late 1970s with a proposal for a<br />
directive in 1979. 29 The explanatory memorandum accompanying the proposal explained the objective of<br />
the directive in the following terms:<br />
―The harmonization of contract law in connection with freedom to provide services and freedom<br />
of choice of applicable law has a twofold objective. Firstly, to guarantee the policyholder that<br />
whatever the choice of applicable law, he will receive identical protection as regards the<br />
essential points of the contract. Secondly, to eliminate as competition factors for undertakings<br />
the fundamental differences between national laws.‖<br />
1.35 The proposed 1970s draft insurance contracts directive did not seek to operate across<br />
insurance generally: life and health insurance were excluded, as was MAT insurance and some others.<br />
The reaction of the British insurance industry in particular to the proposed directive was generally hostile.<br />
Eventually, the proposal was withdrawn in 1993. 30<br />
1.36 Viewed at this juncture, the proposed directive was a rather curious text. Articles 3 and 4 set<br />
out provisions on the duty of disclosure with the insurer‘s right to terminate for non-disclosure being<br />
abridged by provisions in which the insured made a proposal to amend the cover; termination could follow<br />
if the policyholder ―may be considered to have acted improperly.‖ A duty to notify the insurer of changed<br />
circumstances was required, a provision that was difficult to operate in the British or Irish context where<br />
policies are concluded annually and where the duty of disclosure is normally spent when cover<br />
commences. Most controversially of all, the draft directive provided that if a claim arises before the<br />
amendment or termination of the contract, ―the insurer shall be liable to provide any such cover as is in<br />
accordance with the ratio paid between the premium paid and the premium that the policyholder should<br />
have paid if he had declared the risk correctly.‖ Other provisions in the proposal dealt with the return of<br />
unjustified payments, premium reductions in the event of risk reduction, contract termination and third<br />
party beneficiaries.<br />
27<br />
28<br />
29<br />
30<br />
J & E Davy v Financial Services Ombudsman [2008] IEHC 256, [2010] IESC 30. The case is essentially a<br />
judicial review decision. The UK literature on the UK FOS also points to how the merger of Judicial Review<br />
provision with complex private and commercial law issues is ―sub-optimal‖: Morris, ―The Intersection of<br />
Commercial Powers and Complaints‖ [2009] LMCLQ 344 at 365.<br />
O.J. No. 2, 15.1.1962 pp.36-62.<br />
Proposal for a Council Directive on the coordination of laws, regulations and administrative provisions relating<br />
to insurance contracts. O.J. 1979 No.C 190/2 as amended by a later text at O.J. 1980, No. C355/30.<br />
O.J. 1993, No. C 228/4.<br />
17
(2) Adverse comments on the proposed insurance contracts directive – the <strong>Law</strong><br />
<strong>Commission</strong> for England and Wales<br />
1.37 The English <strong>Law</strong> <strong>Commission</strong> subjected the draft insurance contracts directive to a devastating<br />
critique in its 1980 Report, <strong>Insurance</strong> <strong>Law</strong>: Non Disclosure and Breach of Warranty. 31 At the onset of the<br />
Report the <strong>Law</strong> <strong>Commission</strong> said that it saw the proposed directive as doing little or nothing to repair<br />
existing defects in English law in relation to the duty of disclosure and breach of warranty. The draft<br />
directive was said to involve the creation of ―complex machinery‖ that would engender uncertainty and<br />
perhaps allow insurers to use their superior bargaining position in a manner adverse to the interests of<br />
the insured. The <strong>Law</strong> <strong>Commission</strong> also considered that if the draft directive was to be adopted English<br />
law would be frozen indefinitely in an unsatisfactory state. 32 More detailed criticisms related to the<br />
proportionality principle in Article 3 insofar as the <strong>Commission</strong> saw the principle affording no guidance on<br />
how calculations were to be made, and that the principle raised difficult issues of proof in relation to the<br />
notional premium. 33 The provisions in Articles 4 to 6 (which related to adjustment to the terms of the<br />
contract due to changes in circumstances) were also attacked on the basis that they were riddled with<br />
ambiguity, were unfamiliar to the common law tradition and ―inappropriate to English law and practice.‖ 34<br />
1.38 When viewed even at this distance the criticisms in the <strong>Law</strong> <strong>Commission</strong> Report retain some<br />
degree of force, particularly in relation to the details found in Articles 4 to 6 of the draft directive. While<br />
the draft directive did not address some of the issues that were of concern to those who saw English law<br />
as defective – for example breach of warranty and causation problems – the <strong>Law</strong> <strong>Commission</strong> can be<br />
itself criticised for overstating the chilling effect that adoption of the draft directive would have had on the<br />
wider task of securing insurance contract law reform in England and Wales. More significantly still, the<br />
attack on the proportionality principle 35 raised issues of definition and operational complexity without, it<br />
may be argued, the <strong>Law</strong> <strong>Commission</strong> dealing adequately with the arguments of some supporters of the<br />
directive who felt that the <strong>Commission</strong>ers were exaggerating those practical difficulties 36 and pointed out<br />
that the courts had experience of making similar decisions or adjustments in other situations. As<br />
discussed below, in the more recent studies and reports the English and Scottish <strong>Law</strong> <strong>Commission</strong>s have<br />
recommended the use of proportionality, sweeping aside the views of the <strong>Law</strong> <strong>Commission</strong> from 1980 on<br />
this point rather unceremoniously.<br />
(3) Recent European Developments<br />
1.39 A significant amount of academic literature on this subject 37 suggests that the European<br />
dimension to the insurance contact law reform debate should not be underestimated. Market conditions<br />
demonstrate that while insurance products in Member States are generally sold by multinationals, through<br />
branches or subsidiary companies established in each jurisdiction for those purposes, there is said to be<br />
a significant body of support by insurers and purchasers for cross border insurance services. Several of<br />
these enthusiasts for a more integrated European insurance market point to the increasing number of<br />
―euro-mobile citizens‖ who move to and live in Member States other than their country of birth and who<br />
cannot easily bring their insurance cover with them in many instances. On the supply side the<br />
jurisdiction-specific nature of insurance products means that there is no internal market, with anti<br />
31<br />
32<br />
33<br />
34<br />
35<br />
36<br />
37<br />
<strong>Law</strong> Com No. 104.<br />
Para 1.21.<br />
Paras 4.2 to 4.31.<br />
Paras 5.1 to 5.18.<br />
The <strong>Law</strong> <strong>Commission</strong>, in the 1979 Working Paper had already voiced objections to the proportionality<br />
principle.<br />
See para 4.16 of <strong>Law</strong> Com No.104.<br />
Eg. Basedow ―The Case for a European Contract Act‖ [2001] JBL 569; Basedow ―<strong>Insurance</strong> Contract <strong>Law</strong> as<br />
Part of an Optional European Contract Act‖ [2003] LMCLQ; Rühl ―Common <strong>Law</strong>, Civil <strong>Law</strong>, and the Single<br />
European Market for insurances‖ (2006) 55 ICLQ 879; Clarke & Heiss ―Towards a European Contract <strong>Law</strong>?<br />
Recent Developments in Brussels‖ [2006] JBL 600.<br />
18
competitive consequences and purchasers being denied new or innovative insurance products and<br />
services. The conventional wisdom is that the rules of private international law are incapable of providing<br />
a satisfactory solution to this situation.<br />
1.40 The insurance directives themselves provide that the applicable law is the place where the<br />
consumer has his or her habitual residence. 38 This situation has recently been reaffirmed in Regulation<br />
EC No. 593/2008 on the law applicable to contractual obligations (―Rome I‖), which provides specific rules<br />
on choice of law in insurance contracts, but in relation to most mass insurance contracts 39 the applicable<br />
law will generally be the law of the country where the policy holder has his or her habitual residence. 40 It<br />
is also to be expected that any litigation will take place in the courts situated in the place where the<br />
policyholder will be habitually resident because Council Regulation (EC) No. 44/2001 (―Brussels I‖)<br />
provides that an insurer may be sued by the policyholder, insured or beneficiary ―in the courts or the place<br />
where the plaintiff is domiciled.‖ These rules on choice of law and jurisdiction make it very difficult for an<br />
insurance product supplier to trade abroad other than through subsidiary companies or branch offices;<br />
those companies or offices may be expected to know and comply with national insurance contract rules,<br />
whereas a parent company cannot reasonably be familiar with such contract rules (most of which are<br />
mandatory) in a multiplicity of countries. Basedow and others 41 have pointed out that the solution does<br />
not lie in allowing the parties to select the law of the insurer‘s domicile as the applicable law. The<br />
Principles of European <strong>Insurance</strong> Contract <strong>Law</strong> (PEICL) explain why such an approach would be both<br />
undesirable in policy terms and ineffective from a competition law perspective:<br />
―the argument turns out to be mistaken. First of all, the approach would deprive the<br />
policyholder of protection by private international law which appears not to be acceptable as a<br />
matter of legal policy. Secondly, the shift mentioned in the rules of private international law<br />
would be followed by a switch in behaviour on the part of insurers and policyholders. Whereas<br />
under the current private international law regime it is chiefly the insurer who hesitates to<br />
provide cross-border services it would be the policyholder who would be reluctant to acquire<br />
foreign insurance products in the absence of private international legal protection. The internal<br />
market would remain incomplete.‖ 42<br />
1.41 The European <strong>Commission</strong>‘s Action Plan 43 has singled out insurance contract law as a critical<br />
area in need of reform, arguing that in the absence of harmonised contract rules, mandatory laws<br />
formulated on a jurisdiction-specific basis means that ―firms are unable to offer, or are deterred from<br />
offering, financial services across borders, because products are designed in accordance with local legal<br />
requirements,‖ 44 the <strong>Commission</strong> stressing that these problems are especially problematic in relation to<br />
insurance contracts. 45 The European <strong>Commission</strong> Action Plan was followed by the opinion of the<br />
European Economic and Social Committee (EESC) on the European <strong>Insurance</strong> contract. 46 In the EESC,<br />
after drawing attention to a wide body of opinion (including the European Federation of National<br />
<strong>Insurance</strong> Associations which opined that diversity of national insurance contract law ―acts as a brake on<br />
the development of cross border transactions in the insurance sector‖) the EESC called for the full<br />
38<br />
39<br />
40<br />
41<br />
42<br />
43<br />
44<br />
45<br />
46<br />
See Second Council Directive 88/357/EEC, article 7(a) (non life) and Directive 2002/83/EEC, articles 1(1)(g)<br />
and 32(1).<br />
Article 7.<br />
In the case of life assurance it is the law of the Member State of which the policyholder is a national.<br />
See the introductory remarks to Principles of European <strong>Insurance</strong> Contract <strong>Law</strong> (Sellier) (2009) at paragraph<br />
16.<br />
Heiss, Introduction to Principles of European <strong>Insurance</strong> Contract <strong>Law</strong> (Sellier, 2009).<br />
A More Coherent European Contract <strong>Law</strong> – An Action Plan. Com (2003) 68 final, p. 47.<br />
Com (2003) final, p.47.<br />
Com (2003) Final, p.48.<br />
CESC 1626/2004, (Rapporteur Pegado Liz).<br />
19
harmonisation of insurance contract law rules on a staged basis. 47 The first stage of this process, it was<br />
suggested, would address:<br />
(a) pre-contractual duties, mainly information;<br />
(b) formation of the contract;<br />
(c) insurance policy, nature, effects and formal requirements;<br />
(d) duration of the contract, renewal and termination;<br />
(e) insurance intermediaries;<br />
(f) aggravation of risk;<br />
(g) insurance premium;<br />
(h) insurance on account of third party.<br />
1.42 The conclusions and recommendations reached by the EESC included a reference to<br />
unanimity of views by all interested parties and a need for gradual harmonisation, to take account of the<br />
<strong>Commission</strong>‘s 1979-80 proposed Directive. 48<br />
(4) The Restatement of European <strong>Insurance</strong> Contract <strong>Law</strong> – The Project Group<br />
1.43 The task of formulating the rules that will seek to harmonise European insurance contract law<br />
has fallen to the Project Group entitled Restatement of European <strong>Insurance</strong> Contract <strong>Law</strong>. This group of<br />
academics, each with considerable expertise in insurance contract law, has been active since 1999 and,<br />
in 2005, the Project Group was included in the European <strong>Commission</strong> sponsored Network of Excellence<br />
on European Contract <strong>Law</strong> (CoPECL). As two of the leading lights in the Project Group have<br />
acknowledged, 49 the Project Group has followed the EESC suggestion that harmonisation of the General<br />
Part of <strong>Insurance</strong> Contract <strong>Law</strong> is to be a starting point, the focus being on mandatory rules for use in<br />
mass-risk insurances. However, 50 the Principles of European <strong>Insurance</strong> Contract <strong>Law</strong> (PEICL) 51 that<br />
have emerged are envisaged as a semi-mandatory code that may serve the parties to an insurance<br />
contract as an optional instrument, a 28 th regime of insurance contract law in Europe. The Project Group<br />
however see the PEICL as mandatory in the sense that, once selected, the PEICL provides all the<br />
relevant contractual rules: the parties are not to be free to cherry-pick individual rules. The Project Group<br />
explain some of the advantages of an optional instrument thus:<br />
―An optional instrument would allow parties to conclude their contract on the basis of European<br />
law instead of national law. This option would offer advantages particularly to ―multiple<br />
players‖, such as entrepreneurs doing business in the European internal market, who would<br />
not have to be concerned with the impact of diverging national contract law regimes on their<br />
transactions. The costs of legal research and adaptation of the contract to each national<br />
system of contract law would disappear. Moreover, an optional instrument would allow for<br />
efficient cross-border use of the Internet in order to sell standard policies. For euro-mobile<br />
policyholders an optional instrument would provide a stable contractual framework that is not<br />
subject to the changing national law of their domiciles.‖ 52<br />
1.44 The <strong>Commission</strong> has found the work of the Project Group to be of considerable assistance in<br />
elaborating proposals in this Consultation Paper on how Irish law should be reformed. Some of the<br />
provisional recommendations are based on the PEICL but the <strong>Commission</strong> is conscious of the need to<br />
47<br />
48<br />
49<br />
50<br />
51<br />
52<br />
CESC 1626/2004, para. 6.3.1.<br />
CESC 1626/2004, para 7.5.<br />
Clarke & Heiss, ―Towards a European Contract <strong>Law</strong>? Recent Developments in Brussels‖ [2006] JBL 600 at<br />
602.<br />
Ibid.<br />
Sellier, 2009.<br />
Ibid, para 135.<br />
20
strike a balance between recommending a radical reform of insurance contract law and adjusting some<br />
outmoded or inappropriate contract rules that are unfair or do not reflect contemporary market practices.<br />
1.45 The work of the Project Group is based on an appreciation that the way forward can best be<br />
chartered through comparative research into substantive law rules developed by national parliaments and<br />
national courts. In one recent comparative study of German and English law, Giesela Rühl argued that<br />
the ―common law and civil law are in fact not as far apart from another as is commonly assumed.‖ 53 Rühl<br />
suggests that while German law and English law have significantly different formal rules 54 on essential<br />
matters such as the duty of disclosure, the role of causation in relation to the insurer‘s ability to avoid the<br />
contract, as well as the effect of non-disclosure, in practice these differences do not lead to radically<br />
different results for the insured. Her argument turns upon the ability and or willingness of the English<br />
judiciary, and the adjudications of the Financial Ombudsman Service (often using good practice<br />
guidelines) to temper the more extreme results of the common law and the Marine <strong>Insurance</strong> Act 1906.<br />
1.46 The difficulty with this approach is immediately apparent if one were required to apply English<br />
case law. 55 Decisions that favour the insured/proposer may just as easily be contrasted with decisions<br />
that go the other way. 56 While Rühl is not suggesting that formal or theoretical differences do not matter –<br />
on the contrary, she puts forward the view that English practical results, especially in consumer insurance<br />
cases make harmonisation of English rules in line with German law less problematical than is generally<br />
thought – her study serves to underline a number of points. Firstly, the contrast between German law<br />
and English formal rules is stark. Rühl in particular characterises English law as having (to a civil lawyer)<br />
―a perceived consumer – hostile attitude‖ that stands as ―a major obstacle towards more unity in the law<br />
of insurance contracts‖. 57<br />
1.47 Secondly, on some of the differences that exist as between English law and German law, the<br />
Irish position is in some respects closer to German law – the deemed knowledge provisions that emerge<br />
from English case-law stand in sharp- contrast to recent Irish decisions and McCarthy J‘s observation in<br />
Aro Road and Land Vehicle Ltd v <strong>Insurance</strong> Corporation of Ireland 58 that good faith in the context of<br />
disclosure ―requires candour and disclosure, not, I think accuracy in itself, but a genuine effort to achieve<br />
the same using all reasonably available resources.‖<br />
1.48 Thirdly, Rühl‘s very insightful analysis points up the level of the difficulty facing any insurance<br />
contract law reformer. Is the task one in which efforts are to be made to minimise the differences<br />
between (formal) rules and (informal) custom and practice? Which set of norms is to be dispositive? Can<br />
covert methods such as judicial subversion of an inappropriate rule ever to be an acceptable substitute<br />
for legislative action to reform substantive law rules?<br />
53<br />
54<br />
55<br />
56<br />
57<br />
58<br />
Rühl, ―Common <strong>Law</strong>, Civil <strong>Law</strong>, and the Single European Market for insurances‖ (2006) 55 ICLQ 879 at 910.<br />
Specific examples given by Rühl include the duty of a proposer to disclose facts known to the proposer and<br />
facts deemed to be known (English law) whereas German law only requires disclosure of facts actually known.<br />
The same more benign approach to remedies is cited by Rühl, favouring the German view: this includes the<br />
freedom of the insurer to avoid the contract for non-disclosure regardless of degrees of fault (English law)<br />
whereas the availability of remedies may turn on the dishonesty, negligence or innocence of the proposer in<br />
German law.<br />
Eg on promissory warranties Rühl cites contra proferens interpretation as a check on unfair promissory<br />
warranties, citing inter alia Provincial <strong>Insurance</strong> Co v Morgan [1933] AC 240. This view may overestimate the<br />
importance of contra proferens interpretation. Contrast Dawsons Ltd v Bonnin [1922] 2 AC 413 with the<br />
Morgan case and Hales v Reliance Fire and Accident [1960] 2 Lloyd‘s Rep 391.<br />
The conclusion reached at (2006) 55 ICLQ 879 at 899-900 on non-disclosure, that in practice, differences<br />
between German law and English law ―do not actually exist‖ is far too general.<br />
Rühl, ―Common <strong>Law</strong>, Civil <strong>Law</strong>, and the Single European Market for <strong>Insurance</strong>s‖ (2006)55 ICLQ 879 at 880.<br />
[1986] IR 403, citing Fletcher Moulton LJ in Joel v <strong>Law</strong> Union & Crown <strong>Insurance</strong> [1908] 2 KB 863 at 885. An<br />
earlier example can be found in Palles B‘s judgment in Gorman v The Hand in Hand <strong>Insurance</strong> Company<br />
(1877) 11 IRCL 224 articulating a rule of reasonable construction, difficult to reconcile with temporal<br />
restrictions on cover via warranties.<br />
21
1.49 Before leaving the general issue of how European law and developments within the EU may<br />
impact on insurance law and practice in Ireland, it is useful to note that the ECJ may, from time to time,<br />
provide rulings that will constrain the freedom of ―the Market‖ to set contractual terms. The highly<br />
controversial 2011 decision of the Court in Association Belge des Consommateurs Test-Achats ASBL v<br />
Charles Basselier 59 makes it clear that even if actuarial factors can justify using gender as a basis for<br />
fixing a premium, Community law may invalidate such practices. The narrow view of this case is that a<br />
limited derogation in Belgian legislation was incompatible with the principle of equality as between men<br />
and women on the basis that the derogation permitted in Directive 2004/113/EC was transitional whereas<br />
the Belgian legislation was unlimited in duration. The opinion of Advocate General Kokott addressed<br />
wider concerns, highlighting the fact that society will not permit differential premiums to be charged in<br />
relation to race, even if actuarial or statistical data would justify such distinctions from being drawn. As<br />
insurance involves a system whereby risks are pooled with the consequence that the unfit or unhealthy<br />
are subsidised in relation to health insurance by the rest of the population, public policy requires a general<br />
shift towards unisex premiums in certain categories of insurance. These issues were explored by the<br />
United States Supreme Court in their landmark 1978 decision in City of Los Angeles Department of Water<br />
and Power v Manhart 60 :this decision broadly corresponds with the same process of reasoning and<br />
outcome demonstrated by the ECJ in its 2011 Charles Basselier decision.<br />
D<br />
New Legal Norms and forms of Dispute Resolution<br />
(1) The adjudications of the <strong>Insurance</strong> Ombudsman 1992-1998<br />
1.50 Between 1992 and 1998, the then <strong>Insurance</strong> Ombudsman of Ireland, Paulyn Marrinan Quinn,<br />
produced a number of adjudications and settlements that provide extremely valuable insights into how an<br />
effective system of alternative dispute resolution may be allowed to develop outside of the court system.<br />
In the collected decisions for the period in question, the Ombudsman (while noting that the method of<br />
dispute resolution adopted by her office was inquisitorial in nature) stressed that the results of the<br />
<strong>Insurance</strong> Ombudsman‘s adjudications are to be ―fair and reasonable in the circumstances.‖ 61 However,<br />
the <strong>Insurance</strong> Ombudsman also placed an emphasis on the need to ensure that:<br />
―like cases should be treated as alike and be determined on similar principles. Consistency is<br />
exercising judgment and discretion has been my stated aim, from the onset, and of course, this<br />
requires awareness of previous decisions as well as the development of the principles,<br />
practices and jurisprudence over time‖. 62<br />
1.51 It is clear that in developing this jurisprudence, the <strong>Insurance</strong> Ombudsman was in many<br />
situations being guided by the decisions of the High Court and Supreme Court, with decisions such as<br />
Kelleher, Aro Road and Fagan being cited and applied insofar as judicial statements could provide<br />
guidance to the <strong>Insurance</strong> Ombudsman. References to Principles of Good <strong>Insurance</strong> Practice also<br />
informed many of the adjudications (and settlements) made during this period. It appears to the<br />
<strong>Commission</strong> that the jurisprudence of the <strong>Insurance</strong> Ombudsman in this six year period strikes a very<br />
good balance between the traditional approach taken by the courts to issues of pre contractual disclosure<br />
and information gathering exercises, and the more nuanced requirements of consumer protection<br />
principles.<br />
1.52 While the details of the more important adjudications of the <strong>Insurance</strong> Ombudsman will be<br />
considered more fully later in this Consultation Paper, the <strong>Commission</strong> would like to make the following<br />
observations on how the <strong>Insurance</strong> Ombudsman applied the relevant legal principles in the 1992-1998<br />
period:<br />
59<br />
60<br />
61<br />
62<br />
Case C-236/09, judgment of 1 March 2011.<br />
435 US 702 (1998). The Supreme Court struck down contribution differentials in an employee pension plan<br />
requiring female workers to contribute more towards retirement on the basis that female employees enjoyed<br />
grater longevity and thus cost the pension fund more than in the case of male workers.<br />
<strong>Insurance</strong> Ombudsman of Ireland Digest of Cases 1992-1998 (―Digest‖).<br />
See Mission Statement at p.v of Digest.<br />
22
In relation to non-disclosure disputes where material facts were withheld or a pre-existing<br />
condition was not disclosed, the <strong>Insurance</strong> Ombudsman frequently upheld the insurer‘s right to<br />
repudiate the contract. 63 There were decisions however which reflect the view that if a proposal<br />
form does not ask a question about a medical condition vis-á-vis critical illness cover, the insurer<br />
may be deemed to have dispensed with the need of the proposer to volunteer other<br />
information. 64 Decisions on what is a material fact also incline towards the view that the test is<br />
what a reasonable insured would consider to be material, in situations where no proposal form is<br />
used. 65<br />
Situations in which the duty to disclose was not explained to a proposer, contrary to the relevant<br />
code of practice, generally led to a finding against the insurer, especially if there was some<br />
additional factor present such as the policy being a poor match for the needs of the proposer. 66<br />
In some non disclosure decisions the fact that the proposer failed to disclose a material fact,<br />
inadvertently or innocently, led to the claim being upheld, 67 or the application of proportionality, 68<br />
or a recommendation that an ex gratia payment be made. 69<br />
Where there were instances of non-disclosure, the fact that there was no causal link between the<br />
facts not disclosed and the risk that materialised did not prevent the insurer from having a right to<br />
avoid the policy. 70<br />
The decisions of the <strong>Insurance</strong> Ombudsman on misrepresentation (as well as non disclosure of<br />
material facts) tended to follow the same patterns as in the non disclosure cases. In the case of<br />
an innocent misrepresentation as to the age of an insured, the insurer was held not to be entitled<br />
to repudiate the policy because a proportionality remedy was actually contained in the policy. 71<br />
While the <strong>Insurance</strong> Ombudsman clearly distinguished cases of non disclosure from those of<br />
misrepresentation, 72 the insurer was often restricted to a proportionality remedy where the<br />
misrepresentation was not fraudulent. 73<br />
In relation to promissory warranties, cases involving the failure to maintain security measures<br />
tended to lead to a finding that the warranty, if not strictly observed, would allow the insurer to<br />
refuse to meet the claim. 74<br />
The Case Studies reveal also that the <strong>Insurance</strong> Ombudsman often found against the insurer on<br />
the basis that some contractual practices were unsatisfactory (eg exclusions were not<br />
communicated clearly) 75 and that rights to avoid had been waived. 76<br />
63<br />
64<br />
65<br />
66<br />
67<br />
68<br />
69<br />
70<br />
71<br />
72<br />
73<br />
74<br />
75<br />
76<br />
Case studies 47, 49, 154, 155 and 159.<br />
Case studies 15, 16 and 158.<br />
Case Studies 157 and 158.<br />
Case Studies 41, 42, 44 and 50.<br />
Case study 76.<br />
Case Studies 49 and 99.<br />
Case Study 50.<br />
Case Studies 48 and 49.<br />
Case Study 81.<br />
Case Studies 49, 80 and 157.<br />
Case Study 56. See also Case Study 155.<br />
Case Studies 88 and 89.<br />
Eg Case Studies 65 and 87.<br />
Case Studies 58 and 85.<br />
23
(2) Decisions of the Financial Services Ombudsman<br />
1.53 Since 2005, the Financial Services Ombudsman has exercised the statutory jurisdiction to<br />
adjudicate on complaints made to his Office. While the decisions handed down in this period reflect many<br />
of the same approaches to legal issues that are evident in the adjudications of the <strong>Insurance</strong><br />
Ombudsman, the summaries provided by the Financial Services Ombudsman suggest a more ad hoc<br />
approach has been taken in resolving complaints. The Financial Services Ombudsman has stressed the<br />
duty of disclosure and the need for proposers to avoid making misrepresentations as ―fundamental<br />
principles of insurance‖ 77 and has also found against proposers for a failure to carefully read<br />
documentation unless mitigating factors are present. 78 The insurer who finds that his agents do not ask<br />
for information from proposers that is sought in a proposal form may have an award made against the<br />
insurer while being able to avoid payment of the sum insured. 79 ―Proportionality‖ awards may be given,<br />
although such an award sometimes looks more like an award of a ―fair and reasonable‖ amount rather<br />
than proportionality in the strict sense of being an informed decision on what the premium should have<br />
been had the true facts been known or disclosed. 80 The decisions in Aro Road and Kelleher have been<br />
cited and have been extended into business to business insurance providing group cover to employees 81<br />
but those two court decisions were distinguished on the facts and a waiver of rights was held not to have<br />
occurred. In this decision the Financial Services Ombudsman wrote that:<br />
―All complaints received by the Ombudsman are unique and each is considered on its own<br />
merits having regard to the particular facts of the complaint.‖<br />
1.54 This view, which reflects the statutory basis of the Financial Services Ombudsman‘s<br />
jurisdiction, stands in contrast to the more ‗judicial‘ approach of the first <strong>Insurance</strong> Ombudsman, Paulyn<br />
Marrinan Quinn, who stressed a need for consistency in decision making.<br />
(3) The failure to legislate<br />
1.55 The 1976 Final Report of the Committee of Inquiry into the <strong>Insurance</strong> Industry 82 provided the<br />
basis for legislative adjustments to insurance law in the form of the <strong>Insurance</strong> Act 1989. While the 1989<br />
Act addressed many of the concerns raised by the Committee of Inquiry (eg the supervision of insurers,<br />
payment of commissions, the regulation of intermediaries) the failure of the 1989 Act to address all of the<br />
concerns of the Committee of Inquiry in relation to consumer protection is a matter of some regret. The<br />
Committee pointed to a need for legislation to provide for full disclosure to be made in relation to<br />
disclosure and warranties, but the Oireachtas was content to provide for a power to prescribe codes of<br />
conduct. Section 61 of the 1989 Act provides:<br />
―Where the Minister [for Finance] 83 considers it necessary in the public interest and following<br />
consultation with the insurance industry and consumer representatives, he may by order<br />
prescribe codes of conduct to be observed by undertakings in their dealings with proposers of<br />
policies of insurance and policyholders renewing policies of insurance in respect of duty of<br />
disclosure and warranties.‖<br />
1.56 Voluntary codes of conduct evolved through an understanding reached between the<br />
Government and the Industry and these codes have proved effective in dissuading various governments<br />
77<br />
78<br />
79<br />
80<br />
81<br />
82<br />
83<br />
December 2009 Complaints, pages 24-25; July 2009 Complaints, pages 24-26.<br />
See June 2007 Complaints, case 11.<br />
November 2008 Complaints, pages 13-14.<br />
December 2008 Complaints, pages 16-17.<br />
July to December 2007 Complaints, No. 20.<br />
Sometimes described as the O‘Donoghue Report (Prl. 5530 published in March 1976).<br />
When the <strong>Insurance</strong> Act 1989 was enacted, the regulation of insurance undertakings generally had been the<br />
responsibility of the Minister for Industry and Commerce (now known as the Minister for Jobs, Enterprise and<br />
Innovation). The functions under the 1989 Act have since been transferred to the Minister for Finance, who<br />
also has responsibility at Government level for the regulation of other financial services undertakings.<br />
24
from using the section 61 power. However, the precise status of these codes of practice remains<br />
uncertain and it has been pointed out by Buckley 84 that the Circuit Court decision in CB Justice v St Paul<br />
Ireland 85 undermined these codes in a fundamental way. Here the insurer was held to be able to rely on<br />
a proposer‘s breach of warranty even though the non fraudulent breach of warranty had no link with the<br />
loss; the code indicated that an insurer would not repudiate a policy in such circumstances. Buckley is<br />
scathing in his criticisms of the Oireachtas:<br />
―a Code of Conduct, or Statement of Self-Regulatory practice, is not a substitute for reform of<br />
the law. The need for reform is confirmed by the very existence of the Code and by the recent<br />
repudiation of it in open court by a major insurer. Why should a Code of Conduct or a<br />
Statement of <strong>Insurance</strong> Practice be a substitute for legislation rather than a supplement to it?<br />
If Insurers are prepared, under threat of legislation, to adopt a Code of Conduct that<br />
substantially replicates in unenforceable form the broad principles which might have been<br />
enacted, why are they so concerned with avoiding statutory legislation? Why should the Code<br />
be restricted to policies effected by persons in their private capacity only? Why should not the<br />
principle of utmost good faith and its associated duty of disclosure be abolished and allow<br />
legislation to place the onus on insurers to prove fraudulent misrepresentation or fraudulent<br />
non-disclosure in those cases they wish to repudiate?‖ 86<br />
E<br />
The need for contract law reform<br />
(1) Sources of new rules<br />
1.57 The Chapters that follow provide an overview of how Irish insurance contract law is currently<br />
structured, particular attention being paid to the duty of disclosure, insurable interest, misrepresentation,<br />
warranties and basis of contract clauses, as well as the duty of good faith and third party issues. The<br />
<strong>Commission</strong>‘s general conclusion is that the present rules, which have built up around the specialised<br />
area of marine insurance and have been extended horizontally by judicial pronouncements, are<br />
unsuitable to consumer insurance and most forms of mass market business to business insurance in the<br />
21 st Century. The <strong>Commission</strong> notes in particular that the Irish judiciary has been generally extremely<br />
critical of what may be described as less that rigorous business practices in dealings with proposers, and<br />
have adopted a pro-insured position vis-à-vis disclosure, misrepresentations and warranties. Indeed,<br />
many of the provisional recommendations made in this Consultation Paper have been prompted by the<br />
need for Irish statute law to more closely reflect judicial attitudes on these issues. In addition, the impact<br />
of the decisions of the regulatory agencies that have been discussed earlier in this Chapter require some<br />
adjustment of contract law if a diverse range of legitimate interests – from privacy and equality concerns,<br />
consumer protection and the need to ensure that the law meets the reasonable expectations of business<br />
proposers – are to be realised.<br />
1.58 Particular emphasis will be placed on legislative developments and reform proposals in other<br />
countries, particularly, where the common law tradition has shaped insurance law. Wider European<br />
considerations and the work of the Project Group, in the form of the Principles of European <strong>Insurance</strong><br />
Contract <strong>Law</strong> (PEICL), will also be highly relevant. The <strong>Commission</strong> also believes that the way in which<br />
general contract law has evolved provides considerable room for manoeuvring insurance contract rules<br />
into alignment with ‗ordinary‘ contract law principles and remedies. At the same time, the <strong>Commission</strong><br />
seeks to build upon values such as transparency and fairness, as encapsulated in the principle of<br />
84<br />
85<br />
86<br />
Buckely <strong>Insurance</strong> <strong>Law</strong> in Ireland 2nd ed (Oak Tree Press 2002) at para 3-75 to 3-77.<br />
Circuit Court Record No. 008024/2003, 25 November 2004.<br />
Buckley, para 1-19. See also by the same author, Buckley, ―Insurers‘ Self Regulation does not work‖ [2005]<br />
CLP 10. The Association of British Insurers (www.abi.org.uk) continues to produce Codes and Guidance<br />
Notes on General <strong>Insurance</strong>, Life and Savings, and Health and Protection <strong>Insurance</strong>s. For businesses, a<br />
Contract Certainty Code of Practice (2007) is available but ―the code is not compulsory, as that may breach<br />
competition law.‖ There are some very helpful statements on certainty of terms and formalities requirements<br />
that could be built upon in any future legislative text although there is little assistance on non disclosure,<br />
warranties etc.<br />
25
uberrima fidei, regulatory requirements under Irish financial services regulation, and best practice<br />
requirements as they have developed with the Irish <strong>Insurance</strong> industry.<br />
(2) <strong>Reform</strong> Proposals in the United Kingdom – support for legislative changes<br />
1.59 While the issue of insurance contract law reform has been under review in the United Kingdom<br />
since 1954, it is a remarkable fact that until 2011 no Bill had been presented to Parliament by any<br />
Government. The <strong>Law</strong> <strong>Reform</strong> Committee, following its appointment in 1954, expressed a general view<br />
that legislative intervention to improve the position of insureds constituted an interference with freedom of<br />
contract but the Committee still felt able to recommend that the duty of disclosure should be adjusted to<br />
replace the prudent insurer test of materiality with a reasonable insured test. The Committee also<br />
suggested that warranties of fact should not be allowed to be effective when a proposer was able to show<br />
that any misstatement made was true to the best of his knowledge and belief. When the <strong>Law</strong><br />
<strong>Commission</strong> of England and Wales revisited these matters in 1980 the arguments by the insurance<br />
industry favouring self regulation via statements of practice were swept aside on the ground that the duty<br />
of disclosure was unfair and that statements of practice lack the force of law. ―Basis of contract‖ clauses<br />
and warranties of fact set out in proposal forms were also the subject of recommendations that would<br />
have reduced the insurer‘s rights to avoid policies. It is particularly interesting to note that in its 1980<br />
Report the <strong>Law</strong> <strong>Commission</strong> specifically rejected the arguments that any reforms should be limited to<br />
consumer insurance.<br />
1.60 In the period between January 2006 and December 2009, the <strong>Law</strong> <strong>Commission</strong>s of England<br />
and Wales, and of Scotland, have issued a number of documents, a scoping paper, Issues Papers, and a<br />
Consultation Paper with summaries of responses thereto, and, most recently, a final report and draft bill.<br />
These documents have ultimately led the <strong>Law</strong> <strong>Commission</strong>s to reformulate both their agenda and reform<br />
timetable and several of their initial legislative proposals. In particular, the Final Report sets out a rather<br />
modest number of measures that are confined to the consumer insurance duty of disclosure, remedies for<br />
misrepresentation and basis of contract clauses. Nevertheless, the <strong>Law</strong> <strong>Commission</strong>s have remained<br />
consistent in arguing for legislative reform of insurance contract law on the basis that:<br />
the law should be brought into line with both the Financial Ombudsman Service decisions and<br />
industry practice which requires an insurer to have asked clear questions before the insurer may<br />
avoid a policy for non-disclosure; indeed the <strong>Law</strong> <strong>Commission</strong>s go so far as to recommend the<br />
abolition of the residual duty of disclosure in consumer insurance;<br />
codification of best practice would simplify the law and improve consumer confidence in the<br />
insurance industry<br />
reform should also seek to align the position of small businesses with the reform proposals<br />
outlined in relation to consumer insurance;<br />
proposed reforms should include revision of the right of an insurer to avoid policies on the basis<br />
of misrepresentation and breach of warranty, with an insurer‘s rights of avoidance being replaced<br />
in certain instances by financial remedies;<br />
in cases of fraud however, the position of an insurer should remain as it currently is.<br />
1.61 In 2011, the UK Government introduced into the House of Lords the Consumer <strong>Insurance</strong><br />
(Disclosure and Representations) Bill 2011. This Bill is to be processed by reference to the speedy<br />
procedures available in respect of non controversial Bills that involve implementation of <strong>Law</strong> <strong>Commission</strong><br />
proposals. The Bill is the first legislative text to emerge from a detailed and schematic set of insurance<br />
contract law topics that have been the subject of issues papers and consultations. These include subjects<br />
relating in particular to sections 22 and 53 of the Marine <strong>Insurance</strong> Act 1906 as well as general topics<br />
such as insurable interest, the insured‘s post-contract duty of good faith, damages for late payment and<br />
warranties. 87 In this Consultation Paper the <strong>Commission</strong> seeks to provide a set of reform proposals that<br />
will cover many of the topics that have occupied the English and Scottish <strong>Law</strong> <strong>Commission</strong>s.<br />
87<br />
At the time of writing (November 2011), the Committee Stage in the House of Lords had been held on 19<br />
October 2011, and the Report Stage in the House of Lords was scheduled for 20 December 2011.<br />
26
(3) The Financial Regulator – consumer protection code<br />
1.62 The <strong>Commission</strong> is of the view that the Financial Regulator, in the revised Consumer<br />
Protection Code 2012, 88 which takes effect from 1 January 2012, has provided the basis for a new set of<br />
principles that should inform the way in which Irish contract is reformed. 89<br />
1.63 It is important to stress that the Financial Regulator‘s Consumer Protection Code 2012 applies<br />
to all regulated entities and that the content of Chapter 2 of the Code, entitled General Principles,<br />
operates horizontally across the financial services sector: specifically, Chapter 2 applies to all customers<br />
and not just consumers. The 12 General Principles include two principles that the <strong>Commission</strong> considers<br />
to be highly relevant in framing any recommendations for reform.<br />
Rule 2.5 provides a regulated entity ―seeks from its customers information relevant to the product<br />
or service requested.‖<br />
Rule 2.6 requires that a regulated entity ―makes full disclosure of all relevant material<br />
information, including all charges, in a way that seeks to inform the customer.‖<br />
1.64 Furthermore, the Consumer Protection Code 2012 contains detailed rules on disclosure,<br />
formalities, and claims processing.<br />
F<br />
Conclusions and Provisional Recommendations<br />
1.65 Bearing in mind these developments, the <strong>Commission</strong> has concluded that regulatory bodies (in<br />
particular the Financial Regulator and the National Consumer Agency) who currently have statutory<br />
responsibilities in connection with the insurance industry should continue to liaise with each other, and<br />
with representatives of the insurance industry, in order to develop comprehensive statutory Codes of<br />
Practice setting out standards of best practice, building on the best practice standards developed by the<br />
Irish <strong>Insurance</strong> Federation and on the statutory model of the Financial Regulator‘s Consumer Protection<br />
Code 2012. The <strong>Commission</strong> has also concluded that these statutory Codes of Practice should form the<br />
basis for the content of insurance contracts.<br />
1.66 The <strong>Commission</strong> has also concluded, consistently with the approach in its Interim Report on<br />
Personal Debt Management and Debt Enforcement, 90 that legislation should provide that in any litigation<br />
or other dispute resolution process statutory Codes of Practice setting out standards of best practice<br />
should be admissible in evidence; and that, if any provision of such Code is relevant to a question arising<br />
in the litigation or other dispute resolution process, the provision may be taken into account in determining<br />
that question, but that this would be without prejudice to the substantive rights between the parties.<br />
1.67 The <strong>Commission</strong> has also concluded that the legislative framework being proposed in this<br />
Consultation Paper should, in general, apply to consumers as defined for the purposes of the jurisdiction<br />
of the Financial Services Ombudsman, namely natural persons and businesses with an annual turnover<br />
not exceeding €3 million.<br />
88<br />
89<br />
90<br />
The Consumer Protection Code 2012 (which was published in October 2011 after a significant public<br />
consultation process) is more detailed than the previous Consumer Protection Code published in 2006. This<br />
reflects the move from ―principles only‖ (―light touch‖) to ―principles and rules‖ regulation since 2008. The<br />
Code was issued under the following statutory powers: (a) section 117 of the Central Bank Act 1989; (b)<br />
sections 23 and 37 of the Investment Intermediaries Act 1995; (c) section 8H of the Consumer Credit Act<br />
1995; and (d) section 61 of the <strong>Insurance</strong> Act 1989. The Consumer Protection Code 2012 is available at<br />
http://www.centralbank.ie/regulation/processes/consumer-protectioncode/Documents/Consumer%20Protection%20Code%202012.pdf.<br />
It is important to see the Code in a broader international context. The International Association of <strong>Insurance</strong><br />
Supervisors (IAIS) (www.iaisweb.org) is the worldwide representative body for insurance regulators and<br />
supervisors. IAIS has a number of regulatory and standards based codes, perhaps the most pertinent being<br />
the 2003 Principles for the Conduct of <strong>Insurance</strong> Business. The Central Bank of Ireland is an IAIS Member.<br />
Interim Report on Personal Debt Management and Debt Enforcement (LRC 96-2010), paragraphs 2.48-2.57.<br />
27
1.68 The <strong>Commission</strong> provisionally recommends that regulatory bodies (in particular the Financial<br />
Regulator and the National Consumer Agency) who currently have statutory responsibilities in connection<br />
with the insurance industry should continue to liaise with each other, and with representatives of the<br />
insurance industry, in order to develop comprehensive statutory Codes of Practice setting out standards<br />
of best practice, building on the best practice standards developed by the Irish <strong>Insurance</strong> Federation and<br />
on the statutory model of the Financial Regulator‟s Consumer Protection Code 2012. The <strong>Commission</strong><br />
also provisionally recommends that these statutory Codes of Practice should form the basis for the<br />
content of insurance contracts.<br />
1.69 The <strong>Commission</strong> provisionally recommends that legislation should provide that in any litigation<br />
or other dispute resolution process statutory Codes of Practice setting out standards of best practice<br />
should be admissible in evidence; and that, if any provision of such Code is relevant to a question arising<br />
in the litigation or other dispute resolution process, the provision may be taken into account in determining<br />
that question, but that this would be without prejudice to the substantive rights between the parties.<br />
1.70 The <strong>Commission</strong> provisionally recommends that the legislative framework being proposed in<br />
this Consultation Paper should, in general, apply to consumers as defined for the purposes of the<br />
jurisdiction of the Financial Services Ombudsman, namely natural persons and businesses with an<br />
annual turnover not exceeding €3 million.<br />
28
2<br />
CHAPTER 2<br />
INSURABLE INTEREST<br />
A<br />
Introduction<br />
2.01 In this Chapter, the <strong>Commission</strong> notes that although Irish common law did not require an<br />
insurable interest to be present for a contract of insurance to be enforceable, subsequent statutory<br />
developments aimed at counteracting fraud, gambling and criminal destruction of lives and property did.<br />
Thus, while the common law did not distinguish a contract of insurance from other kinds of transaction<br />
that revolved around contingent events, in particular wagers that concerned the question about how long<br />
an individual would live, 1 Parliament intervened in order to discourage gaming as a socially and morally<br />
destructive activity in the Life Assurance Act 1774, 2 which was applied to Ireland by the Life <strong>Insurance</strong><br />
(Ireland) Act 1866. 3 However, the 1866 Act is ambiguous in terms of its scope of application and there is<br />
a clear line of authority in Ireland holding that the 1774 Act does not apply in relation to the sale of goods<br />
and that the Act does not apply to fire insurance – indeed, the 1774 Act is confined to life assurance. 4 If<br />
this is correct then the statutory rule that the contract of insurance requires the person on whose account<br />
the contract is made to have an interest 5 will not prevent such a contract from being enforceable. While<br />
legislation in the form of the 1774 Act, the Gaming Act 1845 and section 36 of the Gaming and Lotteries<br />
Act 1956 render wagering contracts void, it does not follow that a contract involving insurance, for which<br />
no insurable interest can be shown, is a gaming or wagering contract. Section 3 of the 1774 Act and the<br />
indemnity principle in indemnity insurance require the claimant in an insurance contract to prove a loss.<br />
The loss recoverable under the policy is correlated to that loss, although this is not so in the case of<br />
contingency insurance, as distinct from indemnity insurance. 6 This chapter is concerned with the nature of<br />
the insurable interest test, whether the test should be reformed and/or the requirement abolished<br />
altogether.<br />
2.02 The purpose of property insurance is to shift the risk of loss from the insured to the insurer. It<br />
is, therefore, axiomatic that the insurer should only be liable to indemnify the insured for the loss<br />
suffered. 7 Superimposed on this principle of indemnity is the requirement of insurable interest. This<br />
produces the result that two apparently separate and distinct fundamental principles of insurance law are<br />
harnessed in order to serve one objective, namely, to determine the existence and scope of liability of the<br />
insurer for the loss suffered.<br />
1<br />
2<br />
3<br />
4<br />
5<br />
6<br />
7<br />
Earl of March v Pigot (1771) 5 Burr. 2802; British Commercial <strong>Insurance</strong> Company v Magee (1834) Cooke &<br />
Alcock 182. On the history of gaming see Langford, A Polite and Commercial People (OUP, 1992); on life<br />
insurance see Clark, Betting on Lives: the Culture of Life <strong>Insurance</strong> in England 1695-1775 (MUP, 1999).<br />
14 Geo 3,, c.48. The Statute <strong>Law</strong> Revision Act 2007 retained the 1774 Act in force.<br />
29 & 30 Vict., c.42. The Statute <strong>Law</strong> Revision Act 2007 retained the 1886 Act in force.<br />
Church and General <strong>Insurance</strong> Co v Connolly High Court, 7 May 1981; Motor Iinsurance Bureau of Ireland v<br />
PMPA <strong>Insurance</strong> Co [1981] IR 142. See MacGillivray para. 1-044.<br />
A legal or equitable interest as distinct from a mere expectation (for example, a legacy): see Marine <strong>Insurance</strong><br />
Act 1906, section 5(2) .<br />
Medical Defence Union v Department of Trade [1980] Ch 82, at p 89 (Megarry VC). See generally<br />
Templeman in Soyer, <strong>Reform</strong>ing Marine and Commercial <strong>Insurance</strong> <strong>Law</strong>, (Informa <strong>Law</strong> 2008) Ch. 9.<br />
A policy is not prevented from being an indemnity merely because it only covers part of the loss. Valued<br />
policies are not contracts of indemnity in the strict sense since the parties agree the measure of loss at the<br />
time that the contract is concluded rather than at the time of the loss. See Templeman (op cit) page 188,<br />
footnote 3.<br />
29
2.03 In contrast, a non-indemnity ―valued‖ policy pays a set or specified amount to the insured upon<br />
the materialisation of the event or risk specified in the insurance contract. Indemnity insurance, on the<br />
other hand, will only indemnify the claim up to and to the extent of the loss. This distinction is of critical<br />
importance as most life policies are contracts paying a fixed amount on the death of the assured. Life<br />
assurance policies were considered to be contacts of indemnity until the 1807 case of Godsall v Boldero 8<br />
was held to have been wrongly decided by the Court of Exchequer Chamber in Dalby v The India and<br />
London Life Assurance Company. 9 Parke B said that:<br />
―The contract commonly called life-assurance, when properly considered, is a mere contract to<br />
pay a certain sum of money on the death of a person, in consideration of the due payment of a<br />
certain annuity for his life, - the amount of the annuity being calculated, in the first instance,<br />
according to the probable duration of the life: and when once fixed it is constant and invariable.<br />
The stipulated amount of annuity is to be uniformly paid on one side, and the sum to be paid in<br />
the event of death is always (except where bonuses have been given by prosperous offices)<br />
the same on the other. This species of insurance in no way resembles a contract of<br />
indemnity.‖ 10<br />
2.04 Parke B specifically followed The British <strong>Insurance</strong> Co v Magee in holding that contracts<br />
against fire and marine risks were contracts of indemnity that were enforceable at common law to the<br />
extent of ―the losses sustained by the assured in their buildings, ships and effects.‖ 11<br />
2.05 In the mid-18th century there seems to have been some uncertainty as to whether an insurable<br />
interest was, indeed, required for an enforceable policy. Certainly the courts were enforcing not just<br />
contracts in which the insurer agreed to be liable, 'interest or no interest', but, more generally, wagering<br />
agreements. 12 However, anxieties about the perceived evils inherent in wagering together with ―moral<br />
hazard‖, ie, the concern that allowing those who lack interest to insure might encourage them to bring<br />
about the loss, led to legislative intervention in England. While these Acts never applied to Ireland, the<br />
Life Assurance Act 1774, as applied to Ireland in 1866, and the Marine <strong>Insurance</strong> Act 1906 carried the<br />
definition of insurable interest developed in this context into Irish insurance practices.<br />
2.06 This process of creating an insurable interest requirement began in England with the Marine<br />
<strong>Insurance</strong> Act 1745, 13 which laid down as a prerequisite to the validity of certain insurance contracts that<br />
the insured possess an insurable interest in the subject matter of the policy. 14 This left the question open<br />
as to how insurable interest was to be defined.<br />
2.07 The opening part of this chapter considers the competing tests for determining the requirement<br />
of insurable interest in the context of indemnity insurance. On the one hand, there is a broad conception,<br />
which has come to be known as the factual expectation test, whereby the determinative question is<br />
whether or not the insured in fact suffered some loss from damage to the subject matter, or stood to gain<br />
some advantage from its continued existence. On the other hand, there is a narrower conception, referred<br />
to as the legal interest test, whereby the insured is required to demonstrate not only that he has as a<br />
matter of fact suffered loss but that his indemnification arises from some legally enforceable right in the<br />
8<br />
9<br />
10<br />
11<br />
12<br />
13<br />
14<br />
9 East 72.<br />
(1854) 15 CB 365.<br />
Ibid, at 387.<br />
(1854) 15 CB 365, at 387. Dalby v The India and London Life Assurance Co was followed in Keith v<br />
Protection Marine <strong>Insurance</strong> Co of Paris (1882) 10 LR (Ir) 51.<br />
Although wagers were held not to be enforceable in Goddert v Garrett (1692) 2 Vern 269, they were enforced<br />
in Assevieda v Cambridge (1710) 10 Mod 77; Harman v Van Hatton (1716) 2 Vern 717; De Paiba v Ludlow<br />
(1721) 1 Comyns 361; Dean v Decker (1746) 2 Str 1250. See also Craufurd v Hunter (1798) 8 TR 13. See<br />
generally, R Merkin, ―Gambling by <strong>Insurance</strong>-A Study of the Life Assurance Act 1774‖ [1981] Anglo-American<br />
LR 331.<br />
19 Geo 2, c 37.<br />
Section 1 of the 1745 Act.<br />
30
insured property, which justifies recovery. After some uncertainty, the legal interest test emerged in<br />
England as the orthodox approach. Yet, it is arguable that the policy concerns which serve to underpin<br />
the legal interest test no longer prevail. Indeed, it will be argued that insistence on this test can operate as<br />
a trap for the unwary, insofar as it renders an otherwise unobjectionable policy void thereby frustrating<br />
reasonable commercial expectations. 15<br />
2.08 Further, it is questionable whether modern insurance law should facilitate the evasion of<br />
obligations freely entered into by insurers with full knowledge and or the opportunity to establish what<br />
legal or equitable interest exists or existed at the relevant time.<br />
B<br />
The emergence of the insurable interest requirement<br />
2.09 In this Part, the <strong>Commission</strong> considers the emergence of the principle of insurable interest<br />
culminating in the decision of the House of Lords in Macaura v Northern Assurance Co. 16 The<br />
<strong>Commission</strong> then examines the rather different approach taken by judges in other common law<br />
jurisdictions. The <strong>Commission</strong> discusses how modern English courts have reassessed insurable interest<br />
in a series of subrogation cases and the recent discussion and proposals for reform undertaken by the<br />
English and Scottish <strong>Law</strong> <strong>Commission</strong>s. The <strong>Commission</strong> then moves on to consider what should be<br />
done within this jurisdiction to clarify the insurable intrest requirement. The <strong>Commission</strong> suggests in what<br />
follows that, if it is accepted both that the original policy reasons for insurable interest no longer apply and<br />
that the underlying purpose of insurance is to shift the risk of pecuniary loss, then the requirement for<br />
insurable interest can be dispensed with altogether because its functions are effectively discharged by the<br />
principle of indemnity.<br />
2.10 Like many other 18 th century statutes, the preamble to the Marine <strong>Insurance</strong> Act 1745, in which<br />
its purpose is set out, is somewhat obscure:<br />
―the making of assurances, interest or no interest, or without further proof of interest than the<br />
policy, hath been productive of many pernicious practices, whereby great numbers of ships, with<br />
their cargoes, have either been fraudulently lost and destroyed, or taken by the enemy in time of<br />
war; and such assurances have encouraged the exportation of wool, and the carrying on many<br />
other prohibited and clandestine trades, which by means of such assurances have been<br />
concealed, and the parties concerned secured from loss, as well to the diminution of the public<br />
revenue, as to the great detriment of fair traders: and by introducing a mischievous kind of<br />
gaming of wagering, under the pretence of assuring the risque on shipping, and fair trade, the<br />
institution and laudable design of making assurances, hath been perverted; and that which was<br />
intended for the encouragement of trade and navigation, has in many instances, become hurtful<br />
of, and destructive to the same.‖ 17<br />
2.11 Section 1 of the 1745 Act states that all insurance contracts on British ships and their cargoes are<br />
declared ―null and void‖ where made ―interest or no interest, free of average, or without benefit of salvage<br />
to the assurer‖. 18 In a series of cases in which the scope of the 1745 Act was considered, Lord Mansfield<br />
15<br />
16<br />
17<br />
18<br />
Lord Mansfield, in Carter v Boehm (1766) 3 Burr 1905, expressed the view that insurers who take insurance<br />
premiums aware that the policy may be void should not be able to invoke non disclosure against an insured.<br />
See the discussion by Watterson in Mitchell and Mitchell, Landmark Cases in the <strong>Law</strong> of Contract (Hart,<br />
2008), pp.110-116 especially by way of public policy. However, there is no case law suggesting that doctrines<br />
of waiver, estoppel or election operate in this way.<br />
[1925] AC 619.<br />
For a brief history see Templeman (op cit).<br />
See Kent v Bird (1777) 2 Cowp 583. The provisions in the 1745 Act were repealed by the Marine <strong>Insurance</strong><br />
Act 1906 (s.92) and replaced by s.4 of the 1906 Act, under which a wager policy is void, but not illegal. Note<br />
also that section 1(1) of the Marine <strong>Insurance</strong> (Gambling Policies) Act 1909 (which is to be cited with the 1906<br />
Act as the Marine <strong>Insurance</strong> Acts 1906 and 1909 and was also retained by the Statute <strong>Law</strong> Revision Act<br />
2007) provides that, where any person effects a contract of marine insurance ―without having any bona fide<br />
interest, direct or indirect, either in the safe arrival of the ship in relation to which the contract is made or in the<br />
31
CJ expressed the view that it made ―insurance a contract of indemnity‖. 19 For instance, in Lowry v<br />
Bourdieu, 20 the claimants, who had lent money to a ship‘s captain, took out an insurance policy which<br />
would compensate them if the ship failed to arrive. Lord Mansfield held the policy to be a wager and,<br />
therefore, void: ―it was a hedge. But they had no interest; for, if the ship had been lost and the<br />
underwriters had paid, still the plaintiffs would have been entitled to recover the amount of the bond.‖ 21<br />
He went on to observe that:<br />
―There are two sorts of policies of insurance; mercantile and gaming policies. The first sort are<br />
contracts of indemnity, and of indemnity only... The second sort may be the same in form, but<br />
in them there is no contract of indemnity, because there is no interest upon which a loss can<br />
accrue. They are mere games of hazard; like the cast of a die.‖<br />
2.12 Significantly, Lord Mansfield was not denying the enforceability of wagering contracts<br />
generally, but merely acknowledging that the 1745 Act made them unenforceable in relation to marine<br />
adventures by introducing the requirement that the insured demonstrate an insurable interest. 22<br />
2.13 A general definition of insurable interest proved elusive. In Le Cras v Hughes, 23 Lord<br />
Mansfield, perhaps unhelpfully, stated that an interest is necessary, but no particular kind of interest is<br />
required. He did go on to stress, however, that it was not necessary to possess a legal interest in the<br />
insured property. The issue in this case was whether the crews of a Royal Navy squadron had an<br />
insurable interest in two enemy ships they had seized. Lord Mansfield decided that they had for two<br />
reasons. The first was that the crews had rights vested in them by the Prize Acts which gave them a<br />
sufficient interest to support the insurance. This was uncontroversial, but he went on to justify the<br />
decision on the separate ground that there was a moral certainly that the crew would acquire rights over<br />
the seized vessels:<br />
―[w]herever a capture has been made, since the Revolution, by sea or land, the Crown has<br />
made a grant [of the prize ships]: there is no instance to the contrary.‖ 24<br />
2.14 The late 18 th century case law on insurance contracts not covered by the 1745 Act seems<br />
principally to have been driven by the concept that agreements should be enforced rather than be<br />
defeated by the anxiety over wagering. 25 The view was taken that insurance should be encouraged<br />
because it played a key role in commerce by enabling people with little capital to engage in business by<br />
reducing their exposure to risk and ruin. As Marshall observed in his textbook of 1802: 'insurances are<br />
made for the encouragement of trade'. 26 This emphasised the importance of focusing on the social and<br />
commercial benefits of insurance rather than on the restrictions imposed by legislation on wagering.<br />
safety or preservation of the subject-matter insured, or a bona fide expectation of acquiring such an interest,‖<br />
the contract is deemed to be a contract of gambling on loss by maritime perils, and the person effecting it is<br />
guilty of an offence, and must forfeit to the State any money he or she may receive under the contract.<br />
19<br />
20<br />
21<br />
22<br />
23<br />
24<br />
25<br />
26<br />
Le Cras v Hughes (1782) 3 Doug 79, at 86. See also, Moran, Galloway & Co v Uzielli [1905] 2 KB 555 at 563,<br />
per Walton J.<br />
(1780) 2 Doug 468. On Lord Mansfield‘s dislike of wagers and case-law that he was involved in see Swain,<br />
Da Costa v Jones in Mitchell and Mitchell, Landmark Cases in the <strong>Law</strong> of Contract (Hart, 2008).<br />
Ibid, at 470. See also Moran, Galloway & Co v Uzielli [1905] 2 KB 555.<br />
(1780) 2 Doug 468 at 470. It is worth noting here that this did not eradicate the practice of parties entering<br />
into what are known as PPI (Policy Proof of Interest) contracts: the insurers do not raise the issue of the<br />
insurable interest as a defence to a claim, although if the policy is the subject of litigation over another issue<br />
the court will refuse to enforce it. See further, Gedge v Royal Exchange Assurance Co [1900] 2 QB 214.<br />
(1782) 3 Doug 81.<br />
Ibid at 86. See also Boehm v Bell (1799) 8 TR 154.<br />
This was in spite of the efforts of judges such as Buller J in Atherfold v Beard (1788) 2 TR 610 and Good v<br />
Elliott (1790) 3 TR 693.<br />
S Marshall, A Treatise on the <strong>Law</strong> of <strong>Insurance</strong> (1802) pp 99-100.<br />
32
Nevertheless, it was the policy against wagering underlying the 1745 Act that proved to be the decisive<br />
issue in the leading decision of Lucena v Craufurd. 27 Briefly, the facts were that commissioners had been<br />
given statutory authority to take charge of Dutch ships and cargoes in England. Acting under the orders<br />
of the Admiralty, a Royal Navy ship took several Dutch ships at sea. The commissioners then arranged to<br />
insure the ships while they were on their way to England. They were lost before arrival. While the<br />
provisions of the legislation meant that the commissioners would clearly have had an insurable interest in<br />
the ships if they reached these shores, the issue was whether such an interest existed before their arrival.<br />
The case was first argued before Lord Kenyon CJ and a special jury at the Guildhall in 1799; it was then<br />
appealed through the Court of King's Bench and the Exchequer Chamber, and finally reached the House<br />
of Lords in 1802.<br />
2.15 The overwhelming majority of the judges in the lower courts referred to the second ground<br />
given by Lord Mansfield for his decision in Le Cras as support for their view that the commissioners<br />
possessed an insurable interest, that is, the Crown had previously and invariably obtained and granted<br />
prize rights to the crew. Seizure of the Navy gave the Crown an interest that could produce inchoate<br />
interests in others. Similarly, the majority of the judges called to give their advice to the House of Lords<br />
argued that `a vested interest is not necessary to give the right of insuring. The commissioners had a<br />
contingent interest; and supposing the intentions of the Crown to remain unaltered, nothing stood<br />
between them and the vesting of that contingent interest but the perils insured against'. 28 The judges<br />
summed up their approach:<br />
―The question always is, whether the policy be a gaming contract? If it be no artifice how can it<br />
elude the force of the statute? The case of Le Cras v Hughes was infinitely more likely to<br />
introduce an abuse of the statute than the present case. That has been decided above 20<br />
years; yet what ill consequences have followed? The same may be said of valued policies. In<br />
the case of wagering policies, any number of persons may make insurances on the same ship.<br />
But that is not the case here. If the commissioners could not insure this property, the Dutch<br />
owners could not; and it would be a strange paradox to assert, that these are ships and<br />
cargoes subject to all the perils of the sea in their voyage, and yet none are competent to<br />
insure them.‘ 29<br />
2.16 There were two very strong dissenting voices in the House of Lords. Chambre J held that the<br />
statute appointing the <strong>Commission</strong>ers afforded no right over the property until arrival in the jurisdiction.<br />
While <strong>Law</strong>rence J in his dissenting judgment similarly denied the existence of insurable interest, his<br />
reasoning differed. It is worth considering his opinion at some length because of its enduring influence.<br />
He began by defining the nature of an insurance contract in terms of the protection it afforded the insured<br />
partly not merely against loss resulting in deprivation of property but also against uncertain events which<br />
may lead to some other disadvantage, such as loss of anticipated profit. The risk of such loss, damage or<br />
other prejudice is thereby shifted to the insurer.<br />
2.17 Having spoken generally about the nature of interest and insurance, <strong>Law</strong>rence J went on to<br />
formulate what has become known as the factual expectation test:<br />
―To be interested in the preservation of a thing, is to be so circumstanced with respect to it as<br />
to have benefit from its existence, prejudice from its destruction. The property of a thing and<br />
the interest devisable from it may be very different: of the first the price is generally the<br />
measure, but by interest in a thing every benefit and advantage arising out of or depending on<br />
such thing, may be considered as being as comprehended.‖ 30<br />
27<br />
28<br />
29<br />
30<br />
(1802) 3 Bos. & Pul. 75 (Exchequer Chamber) ; (1806) 2 Bos. & Pul. NR 269 (House of Lords).<br />
Before the House of Lords, (1806) 2 Bos. & Pul. NR 269 Le Blanc J, Grose J and Sir James Mansfield CJ took<br />
the same view as the majority in the Exchequer Chamber (they were joined by judges that had already been<br />
of the majority in the lower court – Graham B, Rooke J and Heath J)<br />
(1806) 2 Bos. & Pul. NR 269 at 297<br />
Ibid, at 302-3.<br />
33
2.18 In the House of Lords, Lord Eldon delivered the leading speech. Although he agreed with<br />
<strong>Law</strong>rence J that here there was no insurable interest, Lord Eldon was keen to emphasise the very<br />
different policy consideration which led him to that conclusion. His main concern was with wagering.<br />
Curiously, Lord Eldon rejected the suggestion that before the 1745 Act insurance might have been<br />
effected without interest, but, in any event, he took the view that the Act was decisive and that the courts<br />
should follow its spirit: ―lest that sort of wagering in policies should grow up, which has of late been<br />
extending itself considerably.‖ 31 He rejected the alternative ground for the decision in Le Cras, namely,<br />
that expectation of a grant by the Crown was sufficient:<br />
―What expectation, though founded upon the highest probability, was not interest, and it was<br />
equally not interest, whatever might have been the chances in favour of the expectation‖ 32<br />
2.19 For Lord Eldon the appropriate test was to ask whether the insured possessed 'a right in<br />
property, or a right derivable out of some contract about the property, which in either case may be lost<br />
upon some contingency affecting the possession or enjoyment of the party?' 33 On this basis he said in<br />
the following paragraph, that the commissioners:<br />
―If they have a right so to insure, it seems to me that any person who is directed to take goods<br />
into his warehouse may insure; and that there is nothing to prevent the West India Dock<br />
Company from insuring all the ships and goods which come to their docks. If moral certainty be<br />
a ground of insurable interest, there are hundreds, perhaps thousands, who would be entitled<br />
to insure. First the dock company, then the dock-master, then the warehouse-keeper, then the<br />
porter, then every other person who to a moral certainty would have anything to do with the<br />
property, and of course get something by it.‖<br />
2.20 Whichever of the two tests – <strong>Law</strong>rence J‘s factual expectation test, or Lord Eldon's legal<br />
interest test – is applied, the final outcome in the majority of cases will be the same. The decision in<br />
Lucena itself illustrates the point.<br />
2.21 In cases heard in the 19th century the judges, in so far as the definition of insurable interest<br />
was considered, expressed support for factual expectancy. For example, in Lloyd v Fleming, 34 Blackburn<br />
J said:<br />
―This subject-matter [of the insurance] need not be strictly a property, in either the ship, goods,<br />
or freight; for, as has been long said, if a man is so situated with respect to them that he will<br />
receive benefit from their arriving safely at the end of the adventure, or sustain loss in<br />
consequence of their not arriving " 35<br />
2.22 Notwithstanding the uncertain state of the case law, for marine insurance the issue appeared<br />
to be settled by Chalmers, who in drafting the Marine <strong>Insurance</strong> Act 1906, adopted Lord Eldon‘s test:<br />
―a person is interested in a marine adventure where he stands in any legal or equitable relation<br />
to the adventure or to any insurable property at risk therein, in consequence of which he may<br />
benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or<br />
damage thereto, or by the detention thereof, or may incur liability in respect thereof.‖ 36<br />
31<br />
32<br />
33<br />
34<br />
35<br />
36<br />
(1806) 2 Bos. & Pul. NR 269 at 323<br />
Ibid, at p.323. See also Routh v Thompson (1809) 11 East 428 at 433, per Lord Ellenborough CJ.<br />
(1806) 2 Bos. & Pul. NR 269 at 324<br />
(1872) 7 LR QB 299. See also, Blackburn J's judgment in Wilson v Jones (1867) LR 2 Ex 139, at 150 and<br />
Brett MR in Stock v Inglis (1884) 12 QBD 564. See in particular Moran, Galloway & Co v Uzielli [1905] 2 KB<br />
555.<br />
(1872) 7 LR QB 299, at 302.<br />
Section 5(2).<br />
34
2.23 In the non-marine context, the issue was settled by the House of Lords in Macaura v Northern<br />
Assurance Co Ltd 37 . In this case, Macaura was the only substantial shareholder in a company to which he<br />
had sold timber on credit. He insured the timber in his own name and when it was destroyed by fire<br />
sought to claim against the policies. An initial allegation that Macaura's claim was fraudulent and<br />
dishonest was dismissed by an arbitrator and, apart from a brief statement to that effect, this was not<br />
mentioned in the House of Lords. The issue before the court was whether Macaura had an insurable<br />
interest in the timber owned by the company. Counsel for Macaura, drawing on <strong>Law</strong>rence J, argued that<br />
Macaura's insurable interest derived from his being the only shareholder. It was also argued that a<br />
separate insurable interest arose from his being the only substantial creditor of the company whose only<br />
substantial asset from which the debts could be paid was the timber. On both grounds, it was claimed,<br />
Macaura was bound to benefit by the preservation of the timber and suffer by its destruction. All five of<br />
their Lordships rejected this argument 38 ruling that Macaura had no insurable interest. In giving the<br />
leading speech, Lord Buckmaster cited, with approval, Walton J‘s reasoning in Moran, Galloway & Co v<br />
Uzielli, 39 in which he had said: ―in so far as the plaintiffs' claim depends upon the fact that they were<br />
ordinary unsecured creditors... I am satisfied it must fail.‖ 40 Lord Buckmaster, therefore, dismissed the<br />
idea that a creditor had an insurable interest in the assets of a debtor. His principal objection to Macaura‘s<br />
contention, however, turned on his status and interest in the company as shareholder. If Macaura‘s<br />
argument was accepted, then, in Lord Buckmaster's view, each shareholder in every company would<br />
have an insurable interest in corporate assets and the extent of that interest `could only be measured by<br />
determining the extent to which his share in the ultimate distribution would be diminished by the loss of<br />
the asset — a calculation almost impossible to make.‘ 41 Lord Buckmaster then explicitly attacked<br />
<strong>Law</strong>rence J‘s view in Lucena v Craufurd by saying, ―I find ... difficulty in understanding how a moral<br />
certainty can be so defined as to render it an essential part of a definite legal proposition.‖ 42<br />
C<br />
Modern development of insurance interest and factual expectation in other jurisdictions<br />
2.24 In Canada, Australia, the USA and South Africa a pragmatic approach has been adopted in<br />
response to the perceived social and commercial benefits which widespread insurance offers. The<br />
reasoning in Macaura has been rejected principally on the basis that an overly technical determination of<br />
the insurable interest requirement has the potential to defeat the reasonable commercial expectations of<br />
the parties. 43 In its place the courts have substituted factual expectancy as the determinative test.<br />
(1) Canada, Australia, the USA and South Africa<br />
2.25 Thus, in Constitution <strong>Insurance</strong> Company of Canada v Kosmopoulos, 44 the facts of which<br />
closely resemble Macaura, the Supreme Court of Canada, which had previously followed the restrictive<br />
37<br />
38<br />
39<br />
40<br />
41<br />
42<br />
43<br />
44<br />
[1925] AC 619. Nicholl, in Insurable Interest: As Intended [2008] JBL 432 argues that Lucena v Craufurd is<br />
misunderstood, later courts failing to distinguish between the subject matter of the insurance contract with the<br />
asset that has been lost or damaged. This article contains an interesting analysis of Wilson v Jones (1866-7)<br />
LR 2 Ex 139, stressing the importance of construing the policy so as to identify the insured‘s interest.<br />
Lords Buckmaster, Atkinson, Sumner, Wrenbury and Phillimore.<br />
[1905] 2 KB 555.<br />
Ibid, at 562.<br />
[1925] AC 619 at 627.<br />
[1925] AC 619 at 627.<br />
See further, A J Campbell, 'Some Aspects of Insurable Interest' (1949) 27 Can Bar Rev 1; D Galbraith, 'An<br />
unmeritorious defence—The requirement of insurable interest in the law of marine insurance and related<br />
matters' [1993] <strong>Insurance</strong> 177; RA Hasson, '<strong>Reform</strong> of the <strong>Law</strong> Relating to Insurable Interest in Property—<br />
Some Thoughts on Chadwick v Gibraltar General <strong>Insurance</strong>' (1983-84) 8 Can Bus LJ 114.<br />
(1987) 34 DLR (4th) 208. Noted by L Stuesser (1987-8) 13 Can Bus LJ 227.<br />
35
Lord Eldon formulation, 45 overruled this approach. Wilson J, for the majority, took the view that the<br />
definition of insurable interest was ripe for fundamental re-examination: ―if the application of a rule leads<br />
to harsh justice, the proper course to follow is to examine the rule itself rather than affirm it and attempt to<br />
ameliorate its ill effects on a case-by-case basis.‖ 46 She therefore refused to follow the expedient solution<br />
adopted by her colleague, McIntyre J, of distinguishing Macaura and piercing the corporate veil on the<br />
basis that this was a one-shareholder corporation. 47<br />
2.26 Reviewing Lord Eldon‘s reasoning, which had led Lord Eldon to reject the factual expectation<br />
test, Wilson J cited a passage from Brown and Menezes, <strong>Insurance</strong> <strong>Law</strong> in Canada. 48 Commenting on<br />
Macaura, the authors conclude:<br />
―After Macaura, it is no longer possible to claim merely that one would be adversely affected by<br />
the loss; the insured must assert that he owned an interest in the objects destroyed. This<br />
provides the illusion of great certainty. Property law is among the most technical and certain<br />
segments of the law. This certainty is totally illusory because the new formulation makes no<br />
concessions either to the reasons for which insurable interest is a component of insurance law<br />
or for commonplace business transactions .... Assuming that an insurable interest in `things'<br />
must mean property, among the simple questions raised are matters such as how does one<br />
own a direct interest in property which is not in existence at the time of the contract? Can next<br />
season's crops or fluctuating inventory be insured? Are warehousing and other bailee policies<br />
subject to the law as set out in Macaura so as to limit the right to insure to the bailee's liability<br />
to the bailor?‖<br />
2.27 With respect to Lord Eldon's anxiety that the adoption of the factual expectation test would lead<br />
to too much insurance, Wilson J concluded that that fear ―may also be illusory.‖ Insureds are under a<br />
duty to disclose all material circumstances so that insurers can assess the risk and if an insurer cannot<br />
estimate the likelihood of the loss occurring (because, for example, the information is in the hands of third<br />
parties) then it does not have to write the policy. 49<br />
2.28 Wilson J rejected the argument that a broadly conceived notion of insurable interest would lead<br />
to an increase in the willful destruction of insured property stating that the legal interest test provided no<br />
better deterrent against such moral hazard. She considered that insureds who have a legal or equitable<br />
interest would, in fact, have better access to the insured property and therefore more opportunity to<br />
destroy it than those with an interest in the broader sense: ―If <strong>Law</strong>rence J's definition of insurable<br />
interest... were adopted, this moral hazard would not be increased. Indeed, the moral hazard may well be<br />
decreased because the subject-matter of the insurance is not usually in [their] possession or control.‖ 50<br />
2.29 Recognising that there might be an incentive to sole shareholders to destroy corporate assets,<br />
if insurance moneys were paid to them free of the company's creditors, Wilson J pointed to company law<br />
remedies and doctrines, including the constructive trust and directors' duties, by which the courts can<br />
make the proceeds of insurance policies held by a shareholder available to the company. By such means<br />
the share-holder is more effectively prevented from benefiting personally from a wrongful act.<br />
2.30 Wilson J‘s analysis reflects a shift in emphasis from Lord Eldon's concerns, which led to a<br />
narrow definition of insurable interest, to a view that recognises the economic and social benefits of<br />
insurance and, therefore, a broader conception of insurable interest. In the modern commercial world<br />
property insurance is generally sought to secure indemnification, and, as Wilson J points out, it is more<br />
45<br />
46<br />
47<br />
48<br />
49<br />
50<br />
See, for example, Guarantee Co of North America v Aqua-Land Exploration Ltd (1965) 54 DLR (2d) 29. See<br />
also Wandlyn Motels Ltd v Commerce General <strong>Insurance</strong> Co (1970) 12 DLR (3d) 605.<br />
(1987) 34 DLR (4th) 208, at 214.<br />
Ibid, 210. Although not cited by McIntyre J, support for his approach can be found in Durocher v Gevry [1961]<br />
Que QB 283.<br />
C Brown and J Menezes, <strong>Insurance</strong> <strong>Law</strong> in Canada (Scarborough, Ontario: Carswell, 1982), at 84.<br />
(1987) 34 DLR 4 th 208, at 218.<br />
Ibid, at 224.<br />
36
socially beneficial to encourage widespread insurance than to restrict it. There seems, therefore, no<br />
convincing reason in this context for interfering with freedom of contract and, in particular, for not<br />
requiring insurers to meet liabilities under contracts which they have freely entered into and for which they<br />
have received premiums.<br />
2.31 In Australia Lord Eldon's approach has also been discarded. The Australian <strong>Law</strong> <strong>Reform</strong><br />
<strong>Commission</strong> (ALRC), in its Report <strong>Insurance</strong> <strong>Contracts</strong> 51 concluded that <strong>Law</strong>rence J's formulation ―would<br />
allow more flexibility to insurers and to the insuring public, without in any way promoting gaming and<br />
wagering in the form of insurance or adding to the risk of destruction of the property insured.‖ 52 In its<br />
opinion, technical rules had prevented the insured in Macaura from recovering the loss actually suffered<br />
by him. The ALRC considered that the strict legal interest test gave rise to results that were socially<br />
undesirable. For example, a named beneficiary under the will of a living testator stands to lose much of<br />
his projected inheritance if the testator‘s property is destroyed by fire. Yet, if the beneficiary takes out a<br />
fire policy on the property, the legal interest test will prevent recovery notwithstanding actual loss. The<br />
ALRC also thought that the restrictive test produced commercially undesirable results. By way of<br />
example, it cited Truran Earthmovers Pty Ltd v Norwich Union Fire <strong>Insurance</strong> Society Ltd 53 , in which a<br />
purchaser of a bulldozer was held to have no insurable interest in the vehicle even though he had lent the<br />
owner money which was to be deducted from the purchase price: 'Once again, technical rules prevented<br />
recovery of an actual loss.' 54 The ALRC therefore proposed legislative reform to provide that 'where an<br />
insured is economically disadvantaged by damage to or destruction of the insured property, the insurer<br />
should not be relieved of liability by reason only that the insured did not have a legal or equitable interest<br />
in the property.' 55 This was given statutory effect by the <strong>Insurance</strong> <strong>Contracts</strong> Act 1984, section 17. 56<br />
Thus, an insurable interest is not required in Australia.<br />
2.32 Although early US case law followed Lord Eldon's narrow formulation, 57 the view that most<br />
states have now adopted is that economic interest is the determinative test. 58 . Some 30 years before the<br />
decision in Macaura, the New York courts recognised that shareholders did have an insurable interest in<br />
corporate assets: Riggs v Commercial Mutual <strong>Insurance</strong> Co. 59 Statute law in the USA reflects this<br />
pattern. Two statutory examples will suffice. The California <strong>Insurance</strong> Code, s 281 provides that '[e]very<br />
51<br />
52<br />
53<br />
54<br />
55<br />
56<br />
57<br />
58<br />
59<br />
Report No 20 (1982), ch 5. See also the ALRC Discussion Paper No 63, Review of the Marine <strong>Insurance</strong> Act<br />
1909 (2000), ch 7.<br />
ALRC Report No 20, at para 120.<br />
(1976) 17 SASR 1.<br />
Report No 20, at para 119.<br />
In reaching its recommendation for the adoption of economic interest as the determining question, the ALRC<br />
noted that several American States had adopted this test, citing, by way of example, the New York <strong>Insurance</strong><br />
<strong>Law</strong> s.158, which defines insurable interest as including 'any lawful and substantial economic interest in the<br />
safety or preservation of property from loss, destruction or pecuniary damage.'<br />
See also s.7(1) of the New Zealand <strong>Insurance</strong> <strong>Law</strong> <strong>Reform</strong> Act 1985, which abolishes the requirement of<br />
insurable interest in the case of life insurance and all contracts of indemnity insurance.<br />
See, for example, Farmers' Mutual <strong>Insurance</strong> Co v New Holland Turnpike Road 122 Pa 37 (1888).<br />
See, for example, the decision of the Supreme Court of Massachusetts in Hayes Milford Mutual Fire Ins Co 49<br />
NE 754 (1898). For Californian case law see Smith v Royal <strong>Insurance</strong> Co. 5 F.Supp. 436 (1933) (later<br />
reversed on other grounds); Burns v California Fair Plan 152 Cal App. (4 th ) 646 (2007). For New York case<br />
law see Scarola v <strong>Insurance</strong> Corp of North America 31 NY (2d) 411 (1972) and Lane v Sec. Mut.Ins. Co. 96<br />
NY (2d) 1 (2001). On the related issue of ownership, Appleman, <strong>Insurance</strong> <strong>Law</strong> and Practice sect. 2122<br />
states, ―the excessive technical construction which sole and unconditional ownership policy [behind property<br />
insurance] has outlived its usefulness in the insurance field and therefore no more should be required in these<br />
times of modern industrial development and business expansion than an insurable interest in the property”<br />
(emphasis added). These comments first appeared in Appleman in 1949.<br />
125 NY 7 (1890).<br />
37
interest in respect of the property, or any interest in relation thereto, or liability in respect thereof, of such<br />
a nature that a contemplated peril might directly damnify the insured, is an insurable interest.' In the<br />
codified New York <strong>Insurance</strong> <strong>Law</strong>, Art 34 defines insurable interest in property insurance as including 'any<br />
lawful or substantial economic interest in the safety or preservation of property from loss, destruction or<br />
pecuniary damage.'<br />
2.33 In South Africa, the 1774 Act was never enacted or adopted in any way and the South African<br />
judiciary adopted an economic interest test. In Refrigerated Trucking (Pty) Ltd v Zive 60 a Transvaal Court<br />
has provided a broad ecomonic interest test, following earlier South African authorities that appear to<br />
reject a legal or equitable interest approach, the judges upholding a contract even though the claimant<br />
has ―neither a jus in re nor a jus in rem to the thing insured.‖ 61 In Zive the Court held:<br />
―an insurable interest is an economic interest which relates to the risk which a person runs in<br />
respect of a thing which, if damaged or destroyed will cause him to suffer an economic loss or,<br />
in respect of an event, which if it happens will likewise cause him to suffer an economic loss. It<br />
does not matter whether he personally has rights in respect of that article, or whether the event<br />
happens to him personally, or whether the rights are those of someone to whom he stands in<br />
such a relationship that, despite the fact that he has no personal right in respect of the article,<br />
or that the event does not affect him personally, he will nevertheless be worse off if the object<br />
is damaged or destroyed or the event happens.‖<br />
(2) The current British debate on Insurable interest<br />
2.34 In the few cases where insurable interest is directly in issue, 62 it is not surprising that Macaura<br />
continues to represent the orthodox approach. For instance, in Mitchell v Scottish Eagle <strong>Insurance</strong> Co<br />
Ltd, 63 Mitchell had entered into partnership with his son but had insured the partnership's premises in his<br />
own name. In the Outer House, Lord Prosser, applying the Macaura principle, held that Mitchell lacked an<br />
insurable interest. 64 More directly, in Cowan v Jeffrey Associates, 65 the issue again arose as to the<br />
interest possessed by the director and sole shareholder of a company. Lord Hamilton felt obliged to follow<br />
Macaura, observing that, while it was an English authority and not, therefore, technically binding on him,<br />
nevertheless, it was highly persuasive. In his view the adoption of factual expectancy would require either<br />
legislative intervention or the House of Lords reversing itself. Although these recent Scottish decisions<br />
show the continued importance of the narrow legal interest test, the judiciary has displayed tentative signs<br />
of a willingness to sidestep the force of Macaura. For instance, in Sharp v Sphere Drake <strong>Insurance</strong> Ltd,<br />
“The Moonacre”, 66 Colman J distinguished Macaura and held that the sole shareholder in a company<br />
possessed an insurable interest in a yacht purchased by the company because the yacht was intended<br />
for his use and a power of attorney had been granted to him in respect of it.<br />
2.35 While the requirement of insurable interest has not been subjected to the sort of rigorous<br />
analysis that led other common law countries to adopt the factual expectation test, the English and<br />
60<br />
61<br />
62<br />
63<br />
64<br />
65<br />
66<br />
1996 2 SA 361(T). The insurable insurable interest position in South African law is uncertain according to<br />
Havenga, ―Liberalising the Requirement of an Insurable Interest in (Life) <strong>Insurance</strong>‖ (2006) 18 SA Merc LJ.<br />
259, suggesting that South African judges see the central issue as whether the contract is a wager or not. On<br />
moral hazard see Van Niekerk (2009) 21 SA Merc LJ 126.<br />
Littlejohn v Norwich Union Fire <strong>Insurance</strong> Society 1905 TH 374; See Reinecke and S Van der Merwe, (1984)<br />
101 SALJ 608; Midgley, (1986) SALJ 18.<br />
For the reasons why there have been so few cases, see, J Birds, 'Insurable Interests', in N Palmer and E<br />
McKendrick (eds), Interests in Goods (London: LLP, 1998). The following examination of recent English law<br />
draws heavily from Lowry and Rawlings, <strong>Insurance</strong> <strong>Law</strong> – Doctrines and Principles (2009).<br />
1997 SLT 793.<br />
Lord Prosser drew support for his position from the judgment of Lord Sutherland in Arif v Excess <strong>Insurance</strong><br />
Group Ltd 1987 SLT 473.<br />
1999 SLT 757.<br />
[1992] 2 Lloyd's Rep 501.<br />
38
Scottish courts have, nevertheless, taken cognisance of developments in those jurisdictions. The issue<br />
has emerged in the context of insurers' rights of subrogation. Simply put, on paying a claim in full the<br />
insurer takes on the rights of action which the insured would have had: in effect, the insurer steps into the<br />
shoes of the insured. This means that the insurer can, for instance, sue the tortfeasor responsible for the<br />
loss. However, the tortfeasor can use all the defences that would have been available against the plaintiff<br />
in an action brought by the insured, and the insurer will have no cause of action where the loss is caused<br />
by the insured. 67 This is of particular importance in insurance policies relating to construction contracts, in<br />
which the head contractor is commonly required by the contract to insure the project for their own benefit<br />
and that of the sub-contractors. The issue then comes down to whether the sub-contractor has an<br />
insurable interest which will grant immunity against the insurer's subrogation rights. Of course, if the<br />
position was taken that it is only the insurer who can plead the absence of an insurable interest these<br />
difficult problems could be avoided.<br />
2.36 That the courts distinguish between joint and composite liability is illustrated by Petrofina (UK)<br />
v Magnaload Ltd, 68 in which it was held that the owners, the head contractors and each of the subcontractors<br />
on a construction site, had an insurable interest in the entire works despite the fact that they<br />
were working only on limited parts of the site. Their interest arose not from any ownership or possession,<br />
but from the fact that, in the event of negligence, each sub-contractor could suffer loss should any part of<br />
the works be damaged or destroyed. So, although the sub-contractors lacked property interest in the work<br />
in progress, they had an insurable interest in its continued existence. In so finding, Lloyd J said the case<br />
was analogous with that of an insurable interest possessed by a bailee in goods. Accordingly, it was<br />
possible for a policy covering the entire works to be taken out on a coinsurance basis by the head<br />
contractor and all sub-contractors. Lloyd J reasoned that to hold to the contrary would result in<br />
commercial inconvenience as each sub contractor would need `to take out his own separate policy. This<br />
would mean, at the very least, extra paperwork; at worst it could lead to overlapping claims and cross<br />
claims in the event of an accident. Furthermore ... the cost of insuring his liability might in the case of a<br />
small sub-contractor, be uneconomic.' 69<br />
2.37 The approach taken by Lloyd J was endorsed in National Oilwell Ltd v Davy Offshore (UK)<br />
Ltd. 70 Colman J held that the suppliers of a subsea wellhead completion system for a floating oil<br />
production facility were coinsured‘s under the contractor‘s All Risks policy. Colman J dismissed the<br />
contention that there could not be an insurable interest based merely on potential liability arising from the<br />
existence of a contract between the insured and the owner of property. Instead, he held that an insurable<br />
interest could be found in the insured's proximate physical relationship to the property in question. 71<br />
2.38 In Glengate-KG Properties Ltd v Norwich Union Fire <strong>Insurance</strong> Society Ltd, 72 the English Court<br />
of Appeal considered the meaning of the phrase ―the interest of the insured‖ in a policy covering the<br />
owner of a building against consequential loss following a fire or other insured peril. The issue was<br />
whether the insured could recover for the loss of architect's drawings, which were, at the time of the loss,<br />
owned by the architects, although the insured might eventually have acquired them. It was held that the<br />
insured had an insurable interest in the drawings despite the lack of a proprietary interest. Although the<br />
court saw the insurable interest as being in respect of consequential loss rather than in the actual<br />
67<br />
68<br />
69<br />
70<br />
71<br />
72<br />
Simpson v Thompson (1877) 3 App Cas 279.<br />
[1983] 2 Lloyd's Rep 91. Noted by J Birds [1983] JBL 497. See also Tomlinson (Hauliers) Ltd v Hepburn<br />
[1966] AC 451; Waters & Steel v Monarch Fire and Life Assurance Co (1856) 5 E B 87<br />
[1983] 2 Lloyd‘s Ref 91 at 96-7. In a Canadian case that has been cited before the English courts, the issue<br />
has been reduced to one of construction of the particular terms of the insurance contract: G A Baert<br />
Construction (1960) Ltd v Canada <strong>Insurance</strong> Co [1966] ILR 1-170 (Man CA). Lloyd J followed Commonwealth<br />
Construction Ltd v Imperial Oil Ltd (1976) 69 DLR (3d) 558 in Petrofina.<br />
[1973] 2 Lloyd's Rep 582; Hopewell Project Management v Ewbank Preece Ltd [1998] 1 Lloyd‘s Rep 448.<br />
[1973] 2 Lloyd‘s Rep at 611. See also Stone Vickers Ltd v Appledore Ferguson Shipbuilders Ltd [1991] 2<br />
Lloyd's Rep 288, 301.<br />
[1996] 1 Lloyd's Rep 614.<br />
39
drawings themselves, Auld LJ and Sir lain Glidewell both expressed the view that the drawings could<br />
have been insured on the basis of <strong>Law</strong>rence J's 'factual expectation' test.<br />
2.39 As Lowry and Rawlings argue, this line of authority can, therefore, be seen as amounting to<br />
some recognition of the broader conception of an interest as adopted in Canada and elsewhere.<br />
However, a limit was placed upon this trend by the Court of Appeal in Deepak Fertilisers & Petrochemical<br />
Corporation v Davy McKee (London) Ltd and ICI Chemicals and Polymers Ltd. 73 The Court did accept<br />
the broad conception of insurable interest. It agreed that a sub-contractor in a building contract<br />
possessed an insurable interest in the entire works during construction. This was because of the<br />
economic disadvantage which would be suffered if, in the event of the structure being damaged or<br />
destroyed, they lost the opportunity to complete the work and receive remuneration. However, once the<br />
work had been completed the court stressed that such an interest came to an end. Deepak itself has<br />
been criticised by a later Court of Appeal Decision in which that Court was anxious to carve out an even<br />
broader notion of insurable interest for sound commercial reasons. 74<br />
2.40 It is noteworthy that the broad conception of insurable interest has been utilised beyond the<br />
confines of construction insurance. In Mark Rowlands Ltd v Berni Inns, 75 the issue arose because of a<br />
tenancy agreement that required the lessor to insure premises against fire and to use any proceeds of<br />
insurance to rebuild. The tenant contributed to the premium and was relieved of the duty to repair in the<br />
event of fire damage. The Court of Appeal held that the insurers, who had paid out on the policy following<br />
a fire, could not recover against the tenant. The tenant was not mentioned in the policy, but it was clear<br />
from the terms of the lease that the insurance was effected on his behalf. The court took into account the<br />
fact that the tenant was required to contribute to the premium and that the lease excluded his liability for<br />
fire. Although the insurers were unaware of the arrangement in the lease, the court held that it must have<br />
been the intention of the lessor and lessee that in the event of a fire the lessor's loss would be recouped<br />
from the insurance policy. This meant there would be no other claim against the tenant by the lessor, or,<br />
therefore, by the lessor's insurer. In his judgment, Kerr LJ ignored Lord Eldon's definition and explicitly<br />
adopted what he termed the 'classic' definition of insurable interest given by <strong>Law</strong>rence J. 76<br />
2.41 Clearly, where the lessor and the tenant jointly take out an insurance policy, the insurer cannot<br />
use the covenant to keep the house in good repair as a means to sue the tenant for damage to the house<br />
because the tenant would be entitled to claim against the policy; unless, of course, the tenant has<br />
deliberately damaged the property, in which case he or she could not claim against the policy. The tenant<br />
will not be able to claim immunity from a subrogated claim by the lessor's insurers in respect of damage<br />
to any parts of the building which are not covered by the lease, as, for instance, where the tenant<br />
negligently sets fire to his or his part of the premises and that fire also damages premises occupied by<br />
another tenant of the same lessor in the same building. 77<br />
(3) Conclusions on the Bitish debate<br />
2.42 The anxieties over moral hazard and wagering that prompted Lord Eldon to reach his view of<br />
insurable interest seem less relevant in the context of modern commercial practice. Lord Eldon‘s test<br />
does not seem to achieve the objectives he believed it would. It does not necessarily provide any better<br />
deterrent against the moral hazard that the insured might destroy the property than the factual<br />
73<br />
74<br />
75<br />
76<br />
77<br />
[1999] 1 Lloyd‘s Rep. 387.<br />
Feasey v Sun Life Assurance Corp of Canada [2003] 2 Lloyd‘s Rep IR 637: see Templeman in Soyer,<br />
<strong>Reform</strong>ing Marine and Commercial <strong>Insurance</strong> <strong>Law</strong> (Informa <strong>Law</strong> 2008) p.207.<br />
[1986] QB 211. Berni Inns was distinguished by Lord Bingham in Co-operative Retail Services v Taylor Young<br />
Partnership [2002] UKHL 17, (2002) 74 Con LR 12, at paragraph 4 of his judgment.<br />
See above at para 2.20.<br />
See Barras v Hamilton 1994 SLT 949.<br />
40
expectation test, indeed, it can be argued that an owner is likely to have more opportunity to damage the<br />
property. 78<br />
2.43 With respect to Lord Eldon's other concern, the dangers of a wager being concealed under the<br />
guise of an insurance contract seem more remote now than they were in the early nineteenth century.<br />
Since that time the activities of insurance and wagering have become separated. Gaming has become a<br />
legitimate activity with sifnificant economic benefits to the ecomony. The <strong>Commission</strong> examines these<br />
issues later in this chapter. Macaura itself has been explained as a case where the insurers believed that<br />
the insured had acted fraudulently, but, because they could not prove the point, they used a lack of<br />
insurable interest as a technical defence.<br />
2.44 Lord Eldon‘s other concern, that without an insurable interest requirement in relation to<br />
property, gaming would be concealed as insurance, has been dealt with through statutory regulation of<br />
financial services and the legitimisation of gaming and betting, where the UK Parliament has provided the<br />
appropriate framework for these activities. Indeed, the UK Gambling Act 2005 has effectively removed<br />
the insurable interest requirement for non marine indemnity insurance but, as Templeman argues, the<br />
effect of the 2005 Act is in many senses completely uncertain. In spite of the 1745 Act and its<br />
successors, Policy Proof of Interest (PPI) contracts, or honour policies, where the insurer agrees not to<br />
raise the issue of insurable interest, remain an important slice of the marine insurance industry. 79 While it<br />
would not make good business sense for the insurer to deny liability, even though such a policy is<br />
unenforceable, it seems curious that in formal terms insurance law is so out of line with commercial<br />
practice. A more fundamental point is that Lord Eldon prioritised the public interest advantages to be<br />
secured in the regulation of gaming through prohibition by the use of insurable interest and failed to give<br />
proper emphasis to pacta sunt servanda, the competing public interest in ensuring that contracting parties<br />
perform their promises. In the final analysis, it is this that underpins the whole of contract law and might,<br />
therefore, be considered as of greater importance in public policy terms.<br />
2.45 Modern insurers can frame coverage on the basis of a proposal in which they can ask such<br />
questions about the relationship between the proposer and the property as they think relevant to their<br />
decision as to whether or not to accept the risk. Moreover, the duty of disclosure, which places the insurer<br />
in an advantageous position when compared with parties in noninsurance contracts, makes it difficult to<br />
justify a situation in which the insurer can freely enter into the contract on the basis of full disclosure and<br />
still deny liability because of a lack of insurable interest. The implications of the lack of litigation directly on<br />
insurable interest since Macaura might be that the insurers accept the logic of this argument, or that the<br />
commercial implications of refusing to pay out would, presumably, be the same as those facing the<br />
bookmaker who failed to pay a winning bet.<br />
2.46 The absence of legal clarity must have adverse commercial results. This is certainly the view<br />
of Mark Templeman QC who comments that large offshore and construction projects are often situated<br />
according to the insurance arrangements that have been made for them. Advising clients (Templeman<br />
says) that such arrangements may be void because the law is unclear, and that it is likely that the<br />
insurable interest point may not be taken by either side in litigation thus saving the insurance<br />
arrangement, is an unstisfacotry position for English law to be in:<br />
―it is even more unsatisfactory for a client, having paid for such advice, to be required to order<br />
its affairs on the basis that a significant transaction may be fatally flawed, but that with any luck<br />
no one will complain. Clearly, the law is in need of reform.‖ 80<br />
2.47 If the policy considerations that underpinned Lord Eldon's definition are no longer relevant,<br />
then one is left to wonder whether the requirement of insurable interest serves any useful purpose. It has<br />
the potential to allow the insurer to defeat the reasonable expectations of the parties and this encourages<br />
78<br />
79<br />
80<br />
See SA Rea Jnr, 'The Economics of <strong>Insurance</strong> <strong>Law</strong>' (1993) 13 Int Rev of <strong>Law</strong> & Economics 145-62. See<br />
generally, Malcolm Clarke, Policies and Perceptions of <strong>Insurance</strong>: An Introduction to <strong>Insurance</strong> <strong>Law</strong> (Oxford,<br />
Clarendon Press, 1997) at 21-22.<br />
See MacGillivray, Ch.1 and Lowry and Rawlings, op cit p.351.<br />
In Soyer, <strong>Reform</strong>ing Marine and Commercial <strong>Insurance</strong> <strong>Law</strong>, (Informa <strong>Law</strong> 2009) p.208.<br />
41
the judges to complicate the law by devising exceptions to the requirement, as has been seen in the<br />
cases on subrogation. Where a party stands to suffer a pecuniary loss it seems illogical to argue that the<br />
desire to insure against such loss is tantamount to wagering. This has been a repeated theme of judicial<br />
comment, in many of the decided cases. The point was made by Mance J:<br />
―... the present policy is not on its face one which the parties made for other than ordinary<br />
business reasons; it does not bear the hallmarks of wagering or the like. If underwriters make a<br />
contract in deliberate terms which covers their assured in respect of a specific situation, a<br />
Court is likely to hesitate before accepting a defence of lack of insurable interest. 81<br />
2.48 Maintaining the insurable interest requirement ignores modern developments such as a<br />
number of statutes permitting third parties to sue insurers directly in certain circumstances,<br />
notwithstanding the absence of insurable interest. One is left to wonder what it adds to the principle of<br />
indemnity under which, in general, the claimant is compensated for the pecuniary loss suffered. It seems<br />
wrong to allow the requirement to be used as a technical defence in circumstances which bear no relation<br />
to its original policy objectives. Where fraud is alleged it should be proved. An insurer always has the<br />
option of refusing to underwrite a risk which is difficult to assess, such as where a shareholder seeks to<br />
insure the assets of a company.<br />
2.49 The continuing insistence on requiring insurable interest—whatever definition is adopted—<br />
harks back to a time when policy issues dictated that this should be a precondition to the validity of the<br />
insurance contract. Once those policy arguments are removed, the justification for the requirement<br />
disappears. 82 Even if, as the <strong>Commission</strong> has shown, a process of assimilation of the factual expectation<br />
test is underway, the obvious question remains, is there a role for insurable interest?<br />
2.50 The <strong>Law</strong> <strong>Commission</strong>s, in Issues Paper No. 4, Insurable Interest criticised the law relating to<br />
contingency insurance, primarily on the basis that the law was both uncertain and difficult to analyse and<br />
was capable of allowing contracts of insurance to be avoided on technical grounds while being capable of<br />
being side-stepped via assignments and other commercial dealings. The <strong>Law</strong> <strong>Commission</strong>s also<br />
suggested that moral hazard and gambling in the guise of insurance were not effectively counteracted by<br />
an insurable interest requirement, especially in the light of the Gambling Act 2005 which has all but<br />
abolished the need for an insurable interest in non-marine indemnity insurance in the United Kingdom. In<br />
cases of contingency insurance the same problems of uncertainty of definition and scope of application<br />
arise and have to be addressed.<br />
2.51 In relation to indemnity insurance, the <strong>Law</strong> <strong>Commission</strong>‘s main proposal was that there should<br />
be no requirement of insurable interest in such insurance. This has been described as a ―plainly<br />
sensible‖ recommendation by one commentator who has subjected Issues Paper No.4 to a critical<br />
evaluation. 83 On the choice between abolition or the possible reform and retention of an insurable interest<br />
in relation to contingency insurance, the <strong>Law</strong> <strong>Commission</strong> favours this latter option on the basis that the<br />
insurable interest in contingency insurance often serves to define insurance vis-à-vis speculative financial<br />
transactions and indeed gambling. But Templeman argues that the insurable interest is ill suited for this<br />
purpose. 84 Similarly, a reluctance to allow persons to effect a life insurance policy in relation to persons<br />
with whom they have no legal or emotional tie<br />
―must stem from a concern that to do so will encourage wrongdoing. But there is really no<br />
evidence that this is so…the deterrents to wrongdoing are the sanctions of the criminal law and<br />
the refusal of the courts to allow a wrong-doer to recover or retain the proceeds of their crime.<br />
81<br />
82<br />
83<br />
84<br />
Cepheus Shipping Corporation v Guardian Royal Exchange Assurance plc (The 'Capricorn') [1995] 1 Lloyd's<br />
Rep 622 at 641, per Mance J.<br />
On this see the comments of the Australian <strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong>, Report No. 20, <strong>Insurance</strong> <strong>Contracts</strong>,<br />
above, and Discussion Paper 63, Review of the Marine <strong>Insurance</strong> Act 1909 para 11.24.<br />
Templeman in Soyer, <strong>Reform</strong>ing Marine and Commercial <strong>Insurance</strong> <strong>Law</strong> (Informa <strong>Law</strong> 2008) Chapter 9. He is<br />
less enamoured of the timing of interest query (p.220 to 221 in Soyer).<br />
Soyer, <strong>Reform</strong>ing Marine and Commercial <strong>Insurance</strong> <strong>Law</strong> (Informa <strong>Law</strong> 2008) Chapter 9.<br />
42
Further, the assignment of life policies and the existence of the [Traded Endowment Policies<br />
Market] themselves give rise to the same risk of wrongdoing.‖ 85<br />
D<br />
The insurable interest test in Irish <strong>Law</strong><br />
2.52 There is no clear statement from the Irish courts on whether a strict legal interest test is to be<br />
applied or whether a factual expectation test, or some variant thereon, will be enough to satisfy an<br />
insurable interest requirement, when this arises. Macaura was considered in Coen v Employers Liability<br />
<strong>Insurance</strong> Co 86 but no opinion was expressed on the relevant test. The facts of PJ Carrigan Ltd and<br />
Carrigan v Norwich Union Fire Society Ltd 87 closely resemble those contained in Macaura itself, but<br />
Lynch J had no difficulty in finding that because the second plaintiff was the holder of a substantial if not a<br />
beneficial interest in a company that had purchased real property, the second plaintiff had in law an<br />
insurable interest. The factual expectation test is in accordance with recent Irish case law 88 that<br />
recognises legitimate expectation as being an alternative basis for recognising promises as enforceable,<br />
even absent some legal ground for holding the promise to be contractually enforceable.<br />
2.53 There are of course difficulties in using legitimate expectation in this way – an insurance<br />
company is not a public body and it is engaged in commercial, not regulatory activities. But contract law<br />
alone can be adequate. If the contract of insurance was characterised as one in which the insurer has<br />
undertaken to extend cover to a proposer or insured, and the facts reveal that the proposer or insured has<br />
a (legitimate) or factual expectation that the policy will be honoured, it is difficult to see why or how an<br />
insurer should be permitted to resile from the contract. The legitimate or factual expectation should of<br />
course be anchored on some appropriate economic relationship between the proposer or insured and the<br />
subject matter of the insurance contract. Wagering contracts will not suffice; situations where the<br />
proposer or insured has suffered no loss because the property is essentially owned by others will be<br />
outside most insurance contracts, by virtue of the indemnity principle. If an insurer is to insist upon being<br />
able to avoid payment upon a policy because no insurable interest existed at the time of the contract, it<br />
might be appropriate to require the insurer to bargain for such a right in express terms and be under a<br />
duty to seek information from the proposer on the nature of the interest held as a sine qua non to such a<br />
right to resile from a contract. In the absence of such an exchange of information, an insurer should be<br />
regarded as not requiring the proposer to have anything other than a factual expectation in the<br />
transaciton or property in question and that the policy will be honoured by the insurer. As the reasoning<br />
of Wilson J in Constitution <strong>Insurance</strong> Co of Canada v Kosmonpoulos attests, the insurable interest<br />
requirement is a poor means of advancing the deterrence functions against wagering and moral hazard,<br />
while at the same time having the negative effect of frustrating the development of socially desirable<br />
insurance policies, especially in the areas of income protection, elderly and disability maintenance<br />
insurance, and life policies.<br />
2.54 In A Casebook of Irish <strong>Insurance</strong> <strong>Law</strong>, Corrigan and Campbell observe: 89<br />
―By and large, however, it is rare for insurers to raise the issue of insurable interest to avoid<br />
their contractual obligations. It is primarily a technical requirement and, in the absence of<br />
significant substantive reasons for relying on it as a defence, it is unlikely that an insurer would<br />
obtain a sympathetic hearing and so succeed in invoking it before an Irish court.‖<br />
2.55 Buckley 90 citing Keaton, <strong>Insurance</strong> <strong>Law</strong>; Basic Text observes that ―it is said that in Macaura the<br />
House of Lords was influenced by unproven allegations of fraud.‖ Ellis and Wiltshire, in Regulation of<br />
85<br />
86<br />
87<br />
88<br />
89<br />
Ibid, p.223.<br />
[1962] IR 314.<br />
High Court, 11 December 1987.<br />
For example, Glencar Exploration plc v Mayo County Council (No2) [2002] 1 IR 84. Promissory estoppel too<br />
may be invoked, but it may be difficult factually to show a representation or reliance in this context: see also<br />
McGrath v Minister for Defence [2010]1 IR 560.<br />
Corrigan and Campbell, A Casebook of Irish <strong>Insurance</strong> <strong>Law</strong>, p.91. In Carrigan for example the substantive<br />
defence was that the loss occasioned by fire had been caused by arson involving the insured.<br />
43
<strong>Insurance</strong> in the UK, Ireland and EU also suggest that a test less onerous than possession of a legal<br />
interest or equitable represents Irish law. Some awareness of the need to liberalise the law is found in<br />
the wider literature. The 1976 O‘Donoghue Report 91 commented on the need to extend insurable interest<br />
so as to cover instances of adoption and give the trustees of trust funds a right to insure where it would<br />
be commercially prudent to do so, but the O‘Donoghue Report did not give a view on the relevant test.<br />
Ellis, in Modern Irish Commercial and Consumer <strong>Law</strong> 92 suggests a working definition of insurable interest,<br />
fusing this definition from a combination of the outcome in the Carrigan case and the views of Wilson J in<br />
Kosmapoulos:<br />
―insurable interest can be said to arise when a person stands in such relationship to the subject<br />
matter of the insurance that:<br />
(1) he benefits by its continued safety (or absence from liability in the case of liability<br />
insurance); or<br />
(2) is prejudiced by its loss (or incurring of a legal liability).<br />
In short, to possess insurable interest, a person must have some financial involvement with the<br />
subject-matter of the insurance.‖<br />
2.56 It is arguable that as the Life Assurance Act 1774 does not apply to fire insurance for<br />
buildings, 93 nor in relation to goods, 94 the most important question to be addressed in Ireland relates not<br />
to the test to be applied but whether the insurable interest requirement in life policies needs to be<br />
repealed or reformed.<br />
2.57 It is clear that Irish courts give unmeritorious insurable interest arguments short shrift.<br />
Dissatisfaction has also been shown by non-judicial decision makers. The insurable interest issue arose<br />
on several occasions in relation to the question whether the non-statutory <strong>Insurance</strong> Ombudsman of<br />
Ireland could take jurisdiction over complaints made by employees arising out of disability claims arising<br />
out of group schemes. The <strong>Insurance</strong> Ombudsman found that an interest could be established when the<br />
complainant was required to pay the premium and initiate the claim, 95 or when the group scheme itself<br />
had been negotiated between the employer and a representative trade union. 96 Even in the case of a<br />
non-contributory group scheme the <strong>Insurance</strong> Ombudsman ruled that jurisdiction existed if the<br />
complainant could be regarded as an individual member; 97 change of position on the basis of assurances<br />
given also had the same effect. 98 However, where a life assurance policy that had been taken out by the<br />
proposer, the complainant‘s (now) estranged husband, the complainant being the life assured and<br />
responsible for paying the premiums, the Ombudsman indicated that she had no power to order the<br />
insurer to effect a transfer of title from the proposer to the complainant. 99<br />
90<br />
91<br />
92<br />
93<br />
94<br />
95<br />
96<br />
97<br />
98<br />
99<br />
Buckley, <strong>Insurance</strong> <strong>Law</strong> 2nd ed (Round Hall 2008), at 36.<br />
See the Final Report of the Committee of Inquiry into the <strong>Insurance</strong> Industry Prl.5530 (March 1976).<br />
Ellis, Modern Irish Commercial and Consumer <strong>Law</strong> (Jordan‘s 2004), at para. 29.25.<br />
Church and General <strong>Insurance</strong> Co v Connolly High Court 7 May 1981.<br />
Motor Insurer‟s Bureau of Ireland v PMPA <strong>Insurance</strong> Ltd [1981] IR 142.<br />
Case 3, Digest 1992-1988.<br />
Case 6, Digest 1992-1998.<br />
Case 4, Digest 1992-1998.<br />
Case 5, Digest 1992-1998. In Case 6 the <strong>Insurance</strong> Ombudsman said the question whether an employee had<br />
an interest in the policy, ―either directly or beneficially‖, it was necessary to consider both the spirit and the<br />
wording of the policy and to deduce the objective and aims of the parties in effecting the insurance.<br />
Case 8, Digest 1992-1998.<br />
44
E<br />
Conclusion on the insurable interest test<br />
2.58 The <strong>Commission</strong> considers that the narrow test for an insurable interest, advocated by the UK<br />
House of Lords in the Lucena case in 1802 and in the Macaura case in 1925, is no longer acceptable. In<br />
any event, Macaura itself has never been endorsed in Ireland. The dicta of Brett MR in Stock v Inglis 100<br />
sets out, in the view of the <strong>Commission</strong>, a compelling argument against a legal or equitable interest test<br />
being deployed:<br />
―in my opinion it is the duty of a court always to lean in favour of an insurable interest, if<br />
possible, for its seems to me that after underwriters have received the premium, the objection<br />
that there was no insurable interest is often, as nearly as possible, a technical objection, and<br />
one which has no real merit, certainly not as between the assured and the insurer.‖ 101<br />
2.59 Accordingly, the <strong>Commission</strong> has concluded that legislation should provide that an otherwise<br />
valid insurance claim cannot be rejected by the insurer solely because the insured lacks an insurable<br />
interest as it has been traditionally defined, that is, a legal or equitable relationship between the insured<br />
and the subject matter of the insurance contract. The <strong>Commission</strong> has also concluded that insurable<br />
interest should, in the interests of certainty, be more broadly defined in legislation as an interest that<br />
subsists when a person may benefit from the continued existence or safekeeping of the subject matter of<br />
the insurance or may be prejudiced by its loss; and that this definition would apply both to non-life<br />
insurance (in particular property and liability insurance) and to life insurance.<br />
2.60 The <strong>Commission</strong> provisionally recommends that legislation should provide that an otherwise<br />
valid insurance claim cannot be rejected by the insurer solely because the insured lacks an insurable<br />
interest as it has been traditionally defined, that is, a legal or equitable relationship between the insured<br />
and the subject matter of the insurance contract.<br />
2.61 The <strong>Commission</strong> provisionally recommends that insurable interest should, in the interests of<br />
certainty, be more broadly defined in legislation as an interest that subsists when a person may benefit<br />
from the continued existence or safekeeping of the subject matter of the insurance or may be prejudiced<br />
by its loss; and that this definition would apply both to non-life insurance (in particular property and liability<br />
insurance) and to life insurance.<br />
F<br />
Insurable interest in Life Policies – common law and statute law<br />
2.62 In British Commercial <strong>Insurance</strong> Company v Magee 102 Joanna Magee had insured the life of<br />
Daniel Ryan for a sum of £500, promising that Daniel Ryan was not in excess of 36 years of age and had<br />
not contracted small-pox or cow pox, had not suffered from gout or the spitting of blood, nor was affected<br />
by any disorder tending to shorten human life. Daniel Ryan was also not to go on the high seas, or<br />
beyond the boundaries of Europe, nor engage in military or naval service without the consent of the<br />
directors of the company. On Daniel Ryan‘s death, Joanna Magee‘s claim for the sum insured was met<br />
by a plea that she had no insurable interest in the life of Daniel Ryan and that the Life Assurance Act<br />
1774 was merely declaratory of the common law. Counsel for the company remarked that ―[i]n some<br />
countries such contracts are prohibited on the ground of their furnishing a temptation to assassination.‖ 103<br />
On the central point concerning public policy, after noting that the Life Assurance Act 1774 had not (at<br />
that time) been applied to Ireland, Bushe CJ, giving judgment for the plaintiff company in the Court of<br />
Exchequer Chamber stated:<br />
―no authority has been cited, to show that such an insurance has been held illegal, as being<br />
against policy or morals in any case decided in England before the Statute; and it is only<br />
necessary to look into the statute to be satisfied that it is not declaratory, for it does not recite<br />
100<br />
101<br />
102<br />
103<br />
(1884) 12 QBD 564.<br />
(1884) 12 QBD 564, at p.571. See also Bright J‘s views in the South Australian Case Truran Earthmovers v<br />
Norwich Union (1976) 17 SASR 1 at 6.<br />
(1834) Cooke and Alcock 182.<br />
(1834) Cooke and Alcock 182, at 188.<br />
45
any existing doubt, or prevailing mistake as to the law [recital recognising the evil of gaming]<br />
and the necessity for preventing it in future.‖ 104<br />
2.63 The net effect of British Commercial <strong>Insurance</strong> Co v Magee is that, at common law, wagering<br />
policies, or policies upon the lives of persons in which the assured has no interest, are valid in Ireland. It<br />
is only through Statute law that such contracts may be void or unenforceable.<br />
2.64 The Life Assurance Act 1774, 105 as applied to Ireland by the Life <strong>Insurance</strong> (Ireland) Act<br />
1866, 106 was enacted at a time when wagering on lives (including, in 1774, the life of King George III) had<br />
become common, and one of main purposes was to ban this practice. The 1774 Act consists of 4<br />
sections. Section 1 provides that insurance contracts on lives or other events 107 should not be affected<br />
where the person to benefit had no interest; contracts by way of gaming and wagering are also prohibited.<br />
Section 2 requires the names of persons for whose use, benefit or on whose account the policy is taken<br />
out to appear on the policy; this was amended in the <strong>Insurance</strong> Act 1989 so as to cover group insurance<br />
policies whereby a class of person may be expressed on the policy. Section 3 limits the amount that can<br />
be recovered to the value of the interest (although life assurance policies are not indemnity policies).<br />
Section 4 excludes from the Act, for historical reasons, policies on ships, goods or merchandises. It is<br />
certainly arguable that the 1774 Act needs to be repealed. Section 1 is either superfluous or in need of<br />
restatement and expansion. Section 2 is, in the view of the English and Scottish <strong>Law</strong> <strong>Commission</strong>s‘,<br />
―superfluous‖ on the basis that section 2 is governed by section 1 in any event. Section 3, which in<br />
Ireland is limited to life insurance contracts, is incompatible with case-law establishing that life policies are<br />
contracts to pay a fixed sum on the occurrence of a stated event. Section 4 is a saver provision that was<br />
necessitated by virtue of the unpalatable consequences that would have followed had goods been caught<br />
up in the rest of the 1774 Act.<br />
2.65 In New Zealand the 1774 Act has been repealed with no discernable consequences and the<br />
<strong>Commission</strong> has provisionally concluded that the Irish position should be the same. However, the<br />
<strong>Commission</strong> recognises that it is arguable that life insurance should continue to require some form of<br />
insurable interest and possibly a consent provision as an alternative basis for effecting a valid contract of<br />
life insurance. The requirement in section 2, even if it can be seen as a formalities provision, should not<br />
be tucked away in an old statute, especially when it provides a technical defence to an action on a life<br />
policy which renders the contract void. Section 3 has been identified as defective insofar as life insurance<br />
taken out to insure the life of a debtor, the debt being for other than a fixed term, will not allow for interest<br />
to be recoverable on such an expectancy. The most significant criticism of the 1774 Act is that it is simply<br />
unnecessary and ineffective in countering wagering contracts and dissuading persons from embarking on<br />
criminal pursuits via moral hazard. 108<br />
2.66 Section 2 is a source of some mischief and in section 26 of the <strong>Insurance</strong> Act 1989 a caveat<br />
was added to section 2 of the 1774 Act so as not to allow the section to invalidate a policy of insurance<br />
for the benefit of unnamed persons if there is a specified class or description of those persons in the<br />
policy which will enable the identity of those persons to be established. This provision applies whether<br />
the policy was made before or after commencement of the section. The English and Scottish <strong>Law</strong><br />
<strong>Commission</strong>s, in their Insurable Interest issues paper, also question the wisdom of retaining these<br />
―entering the names of interested persons‖ provisions. 109 In particular, such a matter as entering the<br />
104<br />
105<br />
106<br />
107<br />
108<br />
109<br />
(1834) Cooke and Alcock 182, at 192.<br />
14 Geo.3, c.48. Siu Yin Kwan v Eastern Ins Co [1994] AC 199 holds indemnity insurance is outside the 1774<br />
Act.<br />
29 & 30 Vict. c.42.<br />
It is this clause that raises issues about the scope of the 1774 Act. In Ireland the issue was settled by Costello<br />
J in Church and General <strong>Insurance</strong> Co v Connolly, High Court, 7 May 1981, in which he stated that ―the 1774<br />
Act only applies in this country to policies of life insurance‖ and that public policy considerations required<br />
illegality principles to apply in that case.<br />
The <strong>Law</strong> <strong>Commission</strong>s, Issues Paper 4, para 4.12.<br />
Issues Paper 4 paras. 6.9 and 6.10.<br />
46
names of beneficiaries into policy documentation could be left as a regulatory requirement, to be<br />
supervised by the Central Bank of Ireland rather than allow policies to be avoided altogether.<br />
2.67 The <strong>Commission</strong> provisionally recommends the repeal of the Life Assurance Act 1774, as<br />
extended to Ireland by the Life <strong>Insurance</strong> (Ireland) Act 1866.<br />
G<br />
Should a remodelled section 1 of the Life Assurance Act 1774 be re-enacted as a<br />
formalities provision?<br />
2.68 While section 1 of the Life Assurance Act 1774 does not define the nature of the interest, there<br />
are four categories that have emerged via case-law.<br />
(1) an interest arising out of natural love and affection;<br />
(2) an interest arising out of a potential financial loss recognised by law which existed at the<br />
time of contracting;<br />
(3) an interest arising out of statutory provisions;<br />
(4) a miscellaneous category recognised by the courts.<br />
(1) Natural Love and Affection<br />
2.69 Natural love and affection will permit a person to insure their own life or that of their spouse.<br />
Other family relationships that cannot satisfy factor (2) or (3) above will not involve an interest that arises<br />
out of natural love and affection. Children and parents have no right to insure each others lives and, a<br />
fortiori, persons related by marriage, siblings, cousins, etc do not possess an insurable interest across<br />
such classes of relative. The most obvious instance in which this rather arbitrary position can be shown<br />
to be socially undesirable relates to cases where a child is born who will, or may, require care at some<br />
time in the future when the child‘s parents could then be expected to have died. Conversely, because a<br />
child is not at any stage charged with obligations to support a parent, no insurable interest will arise if an<br />
adult child, for example, seeks to effect insurance that will provide a financial lifeline for a parent who may<br />
require institutional care, or nursing home accommodation at some future date. Even some attempt to<br />
side-step the insurable interest requirement – for example, describing the policy a burial expenses policy<br />
when the proposer was seeking to insure his mother‘s life because she was also his cook/housekeeper<br />
will not be effective. One commentator 110 on the <strong>Law</strong> <strong>Commission</strong>‘s Insurable Interest Issues Paper has<br />
indicated that there is scant evidence to show that dependants find it difficult to effect insurance and that<br />
steps can be taken to avoid the 1774 Act, for example, by an assignment. These observations seem to<br />
be beside the point. There remains the possibility that the 1774 Act will frustrate a socially desirable<br />
objective and that avoidance techniques such as cross insurance and assignments complicate a process<br />
that should be simple and transparent. There are cases which show that the law can be capricious in the<br />
sense that insurable interests points may not be taken by the courts 111 or that a strict reading of the law<br />
vis-a-vis morally unobjectionable family arrangements may lead to unacceptable results when inadequate<br />
professional services have been rendered. 112<br />
2.70 Cohabitees and persons engaged to be married do not possess any insurable interest in each<br />
other‘s lives. This situation seems to the <strong>Commission</strong> to be unacceptable in the 21 st Century, and when<br />
one considers that the insurable interest survives a decree of judicial separation or a divorce, a major<br />
anomaly clearly exists. The difficulty of legislating clear rules in relation to non-marital relationships and<br />
the insurable interest should not be underestimated but the law needs to be rationalised and clarified. It<br />
may be that such difficulties make outright repeal of an insurable interest requirement the most<br />
appropriate course of action.<br />
110<br />
111<br />
112<br />
Templeman, at 210 of Soyer, <strong>Reform</strong>ine Marine and Commercial <strong>Insurance</strong> <strong>Law</strong> (Informa <strong>Law</strong> 2008).<br />
In Re Slattery [1917] 2 IR 278.<br />
Hayes v Allied British and Foreign Life and Fire <strong>Insurance</strong> Co (1881) 8 LR(Ir) 149. See also on assignment In<br />
Re Power (1882) 11 LR (Ir) 93 and In Re Malet‟s Trusts (1886) 17 LR (Ir) 424.<br />
47
(2) A potential financial loss recognised by law which existed at the time of contracting<br />
2.71 At the present time the insurable interest must be recognised by law and the interest that is<br />
recognised is limited to the interest that is so recognised. A creditor is thus entitled to insure the life of a<br />
debtor and where two persons buy a house on a joint and several basis for the mortgage debt, each<br />
person is able to insure the life of the other to cover the whole of the mortgage debt. As the English and<br />
Scottish <strong>Law</strong> <strong>Commission</strong>s point out, this category of insurable interest is problematical, firstly because<br />
the financial loss test, defined as a pecuniary interest that is capable of valuation, is difficult to define and<br />
excludes general considerations such as ―reasonable expectation‖, as distinct from an enforceable legal<br />
entitlement. Secondly, the <strong>Law</strong> <strong>Commission</strong>s highlight the difficulty in recovering the sums insured when<br />
the courts incline towards giving the insured the amount lost rather than the value of the interest on the<br />
life assured, as of the date the policy was taken out. Thirdly, should the insured recover the sum of<br />
his/her loss (eg via a separate policy of insurance) this will exhaust the entitlement: Hebden v West. 113<br />
The most important practical consequence of this restrictive category arises in relation to<br />
employee/employer and key employee insurance taken out by an employer.<br />
(3) Statutory obligations<br />
2.72 There are relatively few examples of this category in Irish statute law. The Married Women‟s<br />
Status Act 1882, s.11 provides that a policy of insurance taken out by a husband or wife, for the benefit of<br />
his/her spouse or children, creates a statutory trust and the benefits are payable directly to the<br />
beneficiary. There are also judicial decisions that overlap on this issue. A husband may have an<br />
insurable interest in his wife‘s property, to the extent that the parties to the marriage live together and use<br />
that property. Should the husband become insolvent and some chattels be removed from property that<br />
ought to be available to satisfy his creditors, that may be a fraud upon his creditors but will not prevent an<br />
insurable interest arising: Goulstone v The Royal <strong>Insurance</strong> Company. 114 Conversely, Lord Kenyon, in<br />
Reed v Royal Exchange Assurance Company 115 remarked that it is not necessary to show an insurable<br />
interest is held by a wife in her husband‘s property ―as it must be presumed that the plaintiff [wife] was<br />
interested in his life.‖ 116 The Married Women‟s Property Act 1882 has proved an enduring precedent.<br />
Section 11 of the Act provided that a policy of insurance effected by a man or woman on his/her own life,<br />
and expressed to be for the benefit of his/her husband/wife or of their children is to create a trust in favour<br />
of those objects; the monies payable are not to form a part of the estate of the insured so long as any<br />
object of the trust remains unperformed. Case-law suggests that section 11 often produced litigation over<br />
the identity of the beneficiary (eg Prescott v Prescott) 117 and many judicial utterances are directed at the<br />
privity of contract problem rather than that of insurable interest. 118 Section 11 was replaced by section<br />
7(1) of the Married Women‟s Status Act 1957, providing that a trust could arise in relation to a life<br />
assurance or endowment policy expressed to be for the benefit of, or by its express terms purporting to<br />
confer a benefit on, a wife, husband or child of the insured. Section 7(8) defined a child so as to include a<br />
stepchild, illegitimate child, adopted person or person to whom the insured stands in loco parentis.<br />
2.73 The logic of the 1882 and 1957 legislation is clear: children or surviving spouses should have a<br />
source of income, to be provided out of private insurance. Whether this rationale is intelligible within the<br />
context of State welfare provision for adult and child dependants may be an open question, but there is<br />
no doubt that the failure of the legislature to allow adult children to be the subject of insurance cover so as<br />
to facilitate direct financial provision for the healthcare and maintenance requirements of elderly parents<br />
by private insurance is most unfortunate. While the law will already enable a parent to benefit from a life<br />
policy taken out by an adult child by way of assignment it would be preferable to facilitate direct provision<br />
113<br />
114<br />
115<br />
116<br />
117<br />
118<br />
(1863) 3 B & S 579. This case is considered below at M, Valuation Difficulties, para 2.85<br />
(1858) 1 F & F 276.<br />
(1795) Peake Add Cas 70.<br />
See MacGillivray paras. 1.066 to 1.069.<br />
[1905] 1IR 156, following In Re Adams Policy Trusts (1883 ) L3 ChD 525. See also In Re O‟Donnell [1968] NI<br />
52.<br />
Eg Cleaver v Mutual Reserve Fund Life Association [1892] 1QB 147 per Lord Esher at 152.<br />
48
insurance contracts, not least because the insurance industry would be encouraged to develop new<br />
insurance products that would address the health care and maintenance needs of ―the objects‖, to use<br />
the language of the 1882 legislation.<br />
(4) The Miscellaneous Category<br />
2.74 This category exists in English law as a result of Waller LJ‘s speech in Feasey v Sun Life<br />
Assurance of Canada. 119 This decision has not been considered by an Irish court and it has been<br />
doubted by English commentators. The existence of this category can be said to arise out of the<br />
inconvenience of an insurable interest requirement and how it may obstruct otherwise unobjectionable<br />
contractual arrangements in a commercial setting. Rather than heaping an exception onto an exception,<br />
it would be better to reform or even repeal the insurable interest requirement altogether.<br />
(5) The limits of natural love and affection<br />
2.75 The leading cases on the absence of natural love and affection being insufficient to create an<br />
insurable interest as between a parent and child generally revolve around old poor law maintenance and<br />
burial obligations, the effect of which is often to supplant arguments about legal support and contractual<br />
consideration. In Ireland, decisions such as Farrington v Donoghue 120 and Pordage v Canter 121<br />
demonstrate that statutory obligations to support children born outside marriage were imposed upon<br />
mothers, but not fathers. Current Irish legislation imposes support obligations horizontally on parents:<br />
Social Welfare Consolidation Act 2005, section 345. However, in circumstances where a parent takes out<br />
insurance on the life of an adult child the weight of authority stands against an insurable interest being<br />
made out. In Halford v Kymer 122 a father took out a policy of insurance on the life of his son. The issue<br />
was whether the policy could be enforced on the basis that the chance that the father might be supported<br />
by his son in his old age afforded an insurable interest. Bayley J said of the father that ―the parish is<br />
bound to maintain him, and it is indifferent to him whether he be maintained by the parish or his own<br />
son.‖ 123 Recent English authority has cast some doubt on this case, Waller LJ, in Feasey v Sun Life<br />
Assurance Co of Canada and others 124 remarking that ―one wonders whether the same decision would be<br />
reached in the modern era.‖ 125 The fact that many of the cases appear to involve collusive acts by<br />
proposers and agents of the insurer (albeit agents with limited capacity) or even instances of innocent<br />
and ignorant persons being duped by insurance agents, was allowed to speak to the recovery of<br />
premiums paid by the in pari delicto rule but not the enforceability of the underlying contract. There are<br />
isolated cases however where the courts were prepared to allow family members to bargain for support<br />
obligations by analogy with creditor and debtor transactions. Case-law sometimes permitted recovery on<br />
a policy where a family member may have a legal duty to maintain another family member. In Barnes v<br />
London, Edinburgh and Glasgow Life <strong>Insurance</strong> Company 126 the plaintiff promised her mother to maintain<br />
a 10-year-old child, the promisor‘s step-sister; the evidence indicated that the plaintiff had commenced to<br />
perform her promise, taking out a life policy on the child. A self-imposed duty of this kind permitted the<br />
promisor to secure the repayment of the expenses incurred. Lord Coleridge CJ remarked that obligations<br />
of the sort undertaken by the promisor ―were obligations the repayment of which was habitually secured<br />
in this way.‖ Both the Chief Justice and AL Smith J regarded the promisor as having an insurable interest<br />
119<br />
120<br />
121<br />
122<br />
123<br />
124<br />
125<br />
126<br />
[2003] EWCA Civ.885. See MacGillivray generally in Ch.1. Templeman, op cit at p.200 describes Feasey as<br />
commercially sensible but a legally doubtful decision as it recognises a pecuniary interest as sufficing to<br />
satisfy the 1774 statute.<br />
(1866) IR 1 CL 657.<br />
(1854) Ir Jus Rep (05) 246.<br />
(1830) 10 B&C 724.<br />
(1830) 10 B & C 724 at 730.<br />
[2003] EWCA Civ.885.<br />
Ibid, para 83.<br />
[1892] 1 QB 864. This case has been criticised in later English proceedings, discussed in the 2008 Insurable<br />
Interest Issues Paper 4 at para 3.14, footnote 8.<br />
49
to the extent of monies actually expended. AL Smith J distinguished this situation from instances where a<br />
legal obligation to support a child is imposed by law, as in the case of a father and his son. Case-law<br />
holds that should a son seek to contractually recognise benefits obtained from his father no insurable or<br />
pecuniary interest will arise and any policy will be void as between the insurer and the insured:<br />
Worthington v Curtis. 127 The policy behind such instances varied somewhat; the most obvious instances<br />
being a desire to protect vulnerable persons 128 and require truthful disclosures by proposers.<br />
2.76 The fact that natural love and affection was limited to spouses, judged at the time of taking out<br />
the insurance policy led to a range of legislative adjustments in the family context. Legislative provisions<br />
relating to payments upon the death of small children were contained in Friendly Societies legislation; the<br />
Friendly Societies Act 1896 provided that no society should pay any sum of money on the death of a child<br />
under five years of age in excess of £6, or £10 in the case of a child between 5 and under 10 years of<br />
age. 129 Monies were also only to be aid to the parent of the child or the personal representative. 130<br />
Section 67 specifically excluded these restrictions on insurances where the insurer had an insurable<br />
interest in the life of the person insured. Before looking at the 1909 and 1936 Acts, it must be said that<br />
although industrial insurance in Ireland has declined considerably, and the present trend is towards<br />
winding up this form of insurance, the law does reflect some important public policy considerations that<br />
remain valid today. Clearly children need to be protected against any moral hazard that may arise, but<br />
the existence of a cap on the amount payable under a policy on the invalidation of policies on the basis of<br />
absence of an insurable interest seem to be rather clumsy mechanisms which ignore the more effective<br />
deterrents, namely, the public policy proscription against persons benefiting from an illegal act and the<br />
general law against infanticide and murder.<br />
2.77 The Assurance Companies Act 1909 131 was enacted to ameliorate the insurable interest<br />
requirement and the fear of a ―parish burial‖. Section 36(1) of the 1909 Act provided that policies of<br />
assurance could be issued for the purpose of insuring money to be paid for the funeral expenses of a<br />
parent, grandparent, grandchild, brother or sister. Section 36(2) provided that no policy effected before or<br />
after the passing of the Act would be void on the grounds (inter alia) that the person effecting the policy<br />
had no insurable interest at that time, if such a person had a bona fide expectation that he would incur<br />
expenses in connection with the death or funeral of the assured, and the sum assured be not<br />
unreasonable for the purpose of covering those expenses. These life policies were intended to allow the<br />
poor and working classes to have enough money set by to permit a dignified death and burial, rather than<br />
suffer the ignominy of knowing that they would receive a parish or pauper‘s funeral and the case-law that<br />
the statute threw up involved a diverse range of issues such as agent‘s misrepresentation, proposer fraud<br />
and non disclosure, for example. 132 On the question of whether the 1909 Act created an insurable<br />
interest there was a difference of opinion between the Irish and English judges. In O‟Brien v The Irish<br />
National <strong>Insurance</strong> Co Ltd 133 Sealy J observed that section 36(2) ―comes to the relief‖ of the plaintiff who<br />
had taken out a policy in respect of her brother‘s life. Subsequently, in a similar case, Gallagher &<br />
McPartland v The Industrial & Life Assurance Amalgamated Co Ltd, 134 Dixon J observed that the 1909<br />
Act ―made it legal for a policy to be effected on the life of inter alia, a sister for the purpose of providing for<br />
127<br />
128<br />
129<br />
130<br />
131<br />
132<br />
133<br />
134<br />
(1875) 1 Ch D 419 (on the basis, apparently, that consideration is past).<br />
See Section 7 of the Children Act 1908, making it an offence for a nurse or a person maintaining a child to<br />
insure the child‘s life. The dangers of infanticide and easy availability of poisons in Victorian England<br />
contributed to such measures: See Whorton, The Arsenic Century (Toup, 2010).<br />
Friendly Societies Act 1896, s.62. The consequences of non compliance were draconian: see Connors v<br />
London and Provincial <strong>Insurance</strong> (1912) 47 ILTR 148.<br />
Friendly Societies Act 1896, s.63.<br />
9 Edw. 7 Ch. 49.<br />
These cases raised some difficult points of law: eg Griffen v Royal Liver Friendly Society (1942) 76 ILTR 82;<br />
Wall and Wall v New Ireland Assurance Co Ltd [1965] IR 386.<br />
(1932) 66 ILTR 159.<br />
(1946) 80 ILTR 99.<br />
50
funeral expenses, and that provision, in my view implicitly conferred an insurable interest in the life of a<br />
sister.‖<br />
2.78 In England Rowlatt J, on the other hand, questioned whether the 1909 Act created a new<br />
insurable interest; in Goldstein v Salvation Army Assurance Society 135 he thought it did not.<br />
2.79 In Britain, the 1909 Act was repealed and replaced by the Industrial Assurance and Friendly<br />
Societies Act 1929. 136 A significant feature of the 1929 Act was the expansion into endowment policies; in<br />
the broader sense of social policy, individuals were being encouraged to make provision for dependants<br />
via a number of endowment and whole life policies. The 1929 Act did not specifically address the<br />
insurable interest question. 137<br />
2.80 Part V of the <strong>Insurance</strong> Act 1936 effectively replicated the British 1929 Act, specifically<br />
providing however that any policy of industrial assurance effected under section 50 was deemed to create<br />
an insurable interest in the life of the person and that no such policy is to be deemed an indemnity policy.<br />
But even this legislative change, modest though it was, produced some very technical and difficult court<br />
decisions. Policies taken out in respect of funeral expenses under s.36(1) of the Assurance Companies<br />
Act 1909 have been held to be policies of indemnity. When a proposer took out a number of policies on<br />
the life of his mother, for burial expenses, payment by one company was held to discharge the claim in<br />
full. Case-law holds that in the absence of fraud or a mistake of fact, the premiums were not recoverable<br />
as all of the companies were at risk during the currency of the policy: Wolenberg v Royal Co-op Collecting<br />
Society. 138 The existence of an insurable interest was also fatal to recovery of premiums. In Gallagher<br />
and McPartland v The Industrial and Life Assurance Amalgamated Co Ltd, 139 M took out life policies on<br />
his sister but after some time M‘s daughter, G, took over payment of the premiums. Clearly G had no<br />
insurable interest but M‘s insurable interest at the commencement of the policy rendered the contract<br />
valid until such time as M ceased to pay the premium: absent fraud by the company‘s agent, Dixon J held<br />
the premiums irrecoverable: see also Wall and Wall v New Ireland <strong>Insurance</strong> Co. 140<br />
2.81 Although industrial assurance legislation sought to prevent ‗moral hazard‘ by restricting the<br />
availability of cover, there are other means of advancing criminal or undesirable practices. Sham<br />
transactions whereby a limited policy of insurance is taken out by the life to be insured – each person has<br />
an insurable interest in his or her life – with the premiums being paid by third party were likely to be<br />
invalid via the law of misrepresentation: Wainewright v Bland. 141 The leading decision on section 2 of the<br />
1774 Act is Shilling v The Accidental Death <strong>Insurance</strong> Company. 142 Thomas Shilling took out a policy of<br />
life insurance upon his father James Shilling. Thomas effected the policy, apparently as agent of his<br />
father who was in a hazardous occupation; however, James was not aware that his son had effected the<br />
policy. When, following the death of James Shilling his Administratrix claimed on the policy, the company<br />
pleaded non compliance with section 2 of the 1774 Act, reasoning that if a close relative could take out<br />
insurance without that relative‘s knowledge or consent, the temptation to collect on the policy by<br />
materialising the risk (in this case causing James Shilling‘s death) could well be irresistible to some<br />
persons. The policy was held to be void. In Reed v Royal Exchange Assurance Company 143 Mrs Reed<br />
135<br />
136<br />
137<br />
138<br />
139<br />
140<br />
141<br />
142<br />
143<br />
[1914] 2 KB 291.<br />
19 & 20 Geo 5, c.28.<br />
Section 1 of the 1929 Act provided that if a life cover was in place in such an endowment policy, only<br />
reasonable funeral expenses could be payable.<br />
(1915) 112 LT W36.<br />
(1946) 80 ILTR 99.<br />
[1965] IR 386.<br />
(1835) 1 M & Rob 481; see also Collett v Morrison (1851) 9 Hare 162 (extends to life and trustee when both<br />
appear on the policy).<br />
(1858) 1 F & F 116.<br />
(1795) 2 H & N 42. Recovery of premiums on such a wagering contract is not possible: Howard v Refuge<br />
Friendly Society (1886) 54 LT 644.<br />
51
took out a life insurance policy on her husband six days before his death. While Lord Kenyon held that a<br />
wife is presumed to have an insurable interest in the life of her husband, after hearing the facts of the<br />
case and seeing the evidence, ―particularly a letter from the plaintiff to a young man of her acquaintance‖<br />
a claim on the policy was unseccessful (Mrs Reed was subsequently indicted for the murder of her<br />
husband but acquitted).<br />
(6) Debtors and creditors<br />
2.82 A debtor has no insurable interest in the life of a creditor unless there is some consideration<br />
present. Where a creditor promised a debtor that he would not seek to enforce a claim to a debt during<br />
the creditor‘s lifetime, such a promise could not create a pecuniary interest in that life: Hebdon v West. 144<br />
In the case of a creditor who seeks to insure the life of a debtor, such a contract was at one time<br />
considered to be a contract of indemnity that would only enure to the benefit of the policyholder should<br />
the debt remain unpaid following the death of the creditor. 145 This was overruled in Dalby v The India and<br />
London Life. 146 The logic of Dalby case, that a policy of life insurance is a contract to a certain definite<br />
sum at a future time, in consideration for payment of the premiums, is illustrated by <strong>Law</strong> v London<br />
Indisputable Life Policy Co. 147 <strong>Law</strong> purchased from his son a contingent legacy of £3,000, payable to the<br />
son when he reached 30 years of age. <strong>Law</strong> insured his son‘s life for two years, the son being at that time<br />
28 years and four months old. The son reached his 30 th birthday and <strong>Law</strong> was paid the legacy.<br />
However, the son died shortly thereafter and within the two year period of insurance. Wood VC held the<br />
contract was one in which <strong>Law</strong> clearly had an insurable interest, even if the interest was not for the entire<br />
period insured. The contract was not a wagering contract, nor would the court cut down the sum payable<br />
in some way. MacGillivray 148 is critical of the ―unrealistic situation‖ that the 1774 Act produces in this way,<br />
suggesting that in such case the American solution (whereby the creditor‘s interests should be the<br />
amount of the indebtedness at the time of death, and the cost of the insurance with interest, any balance<br />
being payable to the deceased debtor‘s estate) should be adopted into English law.<br />
(7) Property insurance<br />
2.83 Apart from Marine insurance and section 4 of the 1906 Act, there is no statutory insurable<br />
interest requirement in Irish law relating to property. Although the 1774 Act, as extended into Ireland in<br />
1866 has been held not to require an insurable interest for property insurance, 149 property insurance<br />
cases also reflect a judicial sensitivity concerning fraudulent claims, particularly incendiarism. In Sadler‟s<br />
Company v Badcock 150 Mrs Strode leased a house which was insured for £400. Her tenancy expired and<br />
the property was destroyed by fire shortly thereafter. Mr Strode assigned the policy to the ―groundlandlords‖<br />
who sought to enforce the policy. As Mrs Strode was required to have a property in the thing<br />
insured at the time the insurance was made and at the time of the fire, she had no interest that could be<br />
assigned as this policy was intended to insure Mrs Strode from damage, rather that insure the property<br />
from damage. Lord Chancellor Hardwicke remarked that ―if the insured was not to have a property at the<br />
time of the insurance or loss, any one might insure another‘s house, which might have a bad tendency to<br />
burning houses.‖ In contrast, a wharfinger who insures a building and his own goods, as well as property<br />
bailed with him and held ―in trust‖ for the owners of those goods is able to recover on the policy in respect<br />
of third party goods held by the wharfinger on behalf of those third parties: Waters v Monarch Fire and<br />
144<br />
145<br />
146<br />
147<br />
148<br />
149<br />
150<br />
(1863) 3 B & S 218. It is through this category that ‗key employee‘ insurance is obtained for instance.<br />
Godsall v Boldero (1807) 9 East 72.<br />
(1854) 15 C.B. 365.<br />
(1855) 1 K & J 223.<br />
MacGillivray on <strong>Insurance</strong>, 12 th ed, para 1-087.<br />
Church and General <strong>Insurance</strong> Company v Connolly High Court, 7 May 1981; Brady v Irish Land <strong>Commission</strong><br />
[1921] 1 IR 56.<br />
(1743) 1 Wils. KB 8.<br />
52
Life <strong>Insurance</strong> Company. 151 In James v Royal <strong>Insurance</strong> Co. 152 E entered a business partnership with J.<br />
in order to gain access to premises where the business was carried on. E promised the landlord M that<br />
he would insure fixtures and furniture located on the premises. The fixtures and furniture were destroyed<br />
or damaged by a fire. The insurance company resisted the claim on the basis of lack of insurable interest<br />
vesting in E but <strong>Law</strong>son J said E had an insurable interest, both as bailee and by virtue of his being under<br />
a legal obligation to M to insure.<br />
(8) Valuation Difficulties<br />
2.84 On the question whether an employer has an insurable interest in the life of an employee, Irish<br />
law settled this point in 1841 in Scott v Roose. 153 ‗Key employee‘ policies are a matter of common<br />
practice.<br />
2.85 In relation to the converse position, the interest on an employee in an employer‘s life, the<br />
scope of the insurable interest is a matter of controversy because it is limited by the notion of a pecuniary<br />
interest. In Hebden v West, 154 H, a bank clerk, took out a policy of life insurance upon the life of P, the<br />
managing partner of the bank. That policy, for £5,000, was followed by another policy for £2,500 with<br />
another insurance company. H owed P £4,700, a sum which P promised would not be recovered during<br />
his lifetime, and H had a contract of employment, at £600 per annum, for seven years, at the date of P‘s<br />
death. The only pecuniary interest related to H‘s salary which over the period was computed at £4,200.<br />
Because the first insurer had paid out the insured sum of £5,000, an amount that more than covered H‘s<br />
pecuniary interest, an action to recover on the second policy failed on the basis that section 3 of the 1774<br />
Act limited monies payable by reference to the pecuniary interest. The <strong>Law</strong> <strong>Commission</strong> is rightly critical<br />
of this decision arguing that the second company had collected the premiums from an insured who was<br />
clearly not gaming or wagering and that the court, incorrectly, aligned this contract with an indemnity<br />
contract. This limitation has a potentially devastating effect on the recoverability of assured sums. Key<br />
workers, for example, may be so important to an organisation or employer that the employer may seek to<br />
effect insurance on the life of that employee foreseeing that loss of that employee will have very adverse<br />
effects for the business. Some case-law 155 suggests that the employer‘s insurable interest is measured<br />
by the notice period that the employer is entitled to (eg a week, a month or year) rather than anticipated<br />
business losses. Mac Gillivray 156 also points out that the value of an employee may only become<br />
apparent after the insurance has commenced and that any early effort at fixing the mercantile value of<br />
any insurable interest does not really work in this context. The English and Scottish <strong>Law</strong> <strong>Commission</strong>s<br />
state that it is typical practice to value a key employee at a figure of up to 10 times annual salary and<br />
suggest that any such a round figure estimate may be contrary to the 1774 Act. Any other estimate,<br />
based upon likely future business generated by the employee, the English and Scottish <strong>Law</strong><br />
<strong>Commission</strong>s argue, 157 would be an expectation interest rather than a pecuniary interest and thus fail to<br />
satisfy section 1 of the 1774 Act.<br />
151<br />
152<br />
153<br />
154<br />
155<br />
156<br />
157<br />
(1856) 3 EI. & Bl. 870. In marine policies carriers were also held to have an insurable interest in goods carried<br />
by them and for which they might be liable if lost: see Littledale J in Crowley v Cohen (1832) 3 B & Ad. 178.<br />
PPI policies are void where the 1906 Act applies: Edwards (John) & Co v Motor Union <strong>Insurance</strong> Co [1922] 2<br />
KB 249.<br />
(1875) 9 ILTR 194, following Marks v Hamilton (1852) 21 LJ Ex 109.<br />
(1841) 31 Eq. R. 170.<br />
(1863) 3 B & S 579, criticised by the English and Scottish <strong>Law</strong> <strong>Commission</strong>s in Issues Paper 4: Insurable<br />
Interest, para. 3.28.<br />
Simcock v Scottish Imperial Ins Co (1902) 10 SLT 286; Turnbull v Scottish Provident Institution (1896) 34 SLR<br />
146.<br />
Paras 1-073 -1-074. Templeman, op cit p.213 queries whether these problems are theoretical rather than<br />
real, given that policies are enforceable in their own terms and the insurable interest point is never taken by<br />
the insurer.<br />
Para 4.12.<br />
53
2.86 The <strong>Commission</strong> invites submissions as to whether, on the issue of valuation, an insurer<br />
should be free to fix any value with the proposer at the time of concluding the policy of insurance.<br />
H<br />
<strong>Reform</strong>ing the insurable interest requirement in Ireland<br />
2.87 In recommending that a contract should not be defeated solely because the insured lacks a<br />
legal or equitable claim or interest, the <strong>Commission</strong> leaves open the question whether there is any need<br />
to recommend additional reform of the insurable interest requirement. It is possible to take a somewhat<br />
sanguine view on this question: matters of definition vis-à-vis insurance contracts are generally sidestepped<br />
by legislators, regulators and the courts, once it is clear that the arrangement under review is an<br />
acceptable and commercially useful mechanism such as swap or option contracts. These contracts are<br />
intended to lay off risk on loans, debt securities or other assets by reference to a contracting party – it<br />
could be a multinational or even an entity closely linked to a sovereign state, for example, in exchange for<br />
either swap payments or the payment of a premium. Credit derivatives may thus resemble contracts of<br />
insurance, and it is clear that regulators seek to regard such commercial dealings as being regulated<br />
transactions, but the absence of an insurable interest in credit derivative transactions may count against<br />
them being regarded as contracts of insurance, strictu sensu. 158 The weight of opinion is against financial<br />
derivatives being considered to be wagering contracts on the basis that it cannot be said that both parties<br />
will have a common purpose and interest in concluding a wagering contract. The fact that such issues<br />
have not troubled the courts may suggest that commercial practices may legitimise financial dealings that<br />
do not cross over into gaming contracts or raise issues of moral hazard. While this may be so, the recent<br />
analysis of the two <strong>Law</strong> <strong>Commission</strong>s, in their Issues Paper 4, Insurable Interest 159 argues persuasively<br />
for not only the partial retention of the insurable interest requirement but a significant expansion of the<br />
range of persons who may have a statutory insurable interest and the circumstances in which such an<br />
interest may be established. The recasting of the insurable interest requirement along the lines found<br />
elsewhere in Europe and as proposed in the England and Wales 2008 Issues Paper will possibly<br />
stimulate new business for the industry and provide some very important and sound reforms, particularly<br />
in relation to life and healthcare policies vis-à-vis vulnerable adults, an area that the <strong>Commission</strong> has<br />
already considered more generally. 160<br />
2.88 The Life Assurance Act 1774 renders void and illegal any policy of insurance where the<br />
applicant does not, at the taking out of the policy, have an insurable interest in the life of the person to be<br />
insured. It is established that a person will have an insurable interest in the life of his or her spouse,<br />
regardless of whether the death will cause any financial loss. Even if the marriage is ended by way of<br />
divorce, the insurable interest will remain. The Civil Partnership and Certain Rights and Obligations of<br />
Cohabitants Act 2010, through the financial adjustment orders provisions permits a court to require one<br />
civil partner to take out insurance policies for the benefit of the other civil partner, but the legislation stops<br />
short of holding that civil partners have an insurable interest in the life of the other civil partner. This is in<br />
marked contrast to the position in other jurisdictions where an insurable interest has been recognised by<br />
statute or case-law: 161 the UK Civil Partnership legislation makes express provision on this point. 162 The<br />
<strong>Commission</strong> believes that Irish law should do so also.<br />
2.89 The <strong>Commission</strong> has decided that it would be prudent to define an insurable interest in such a<br />
way as to reflect the factual expectation test. In addition, the <strong>Commission</strong> believes that in respect of<br />
158<br />
159<br />
160<br />
161<br />
162<br />
See Generally Smith, ―The Legal Nature of Credit Default Swaps‖ [2010] LMCLQ 386.<br />
Issues Paper 4: the <strong>Commission</strong>s ―tentatively‖ proposed to retain the requirement in non-indemnity contracts<br />
for lives, para. 7.40.<br />
<strong>Insurance</strong> policies in respect of wardship is discussed in the <strong>Commission</strong>‘s Report on Vulnerable Adults and<br />
the <strong>Law</strong> (LRC 83-2006).<br />
See generally Kelly, the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 – A<br />
Commentary (Thomson Roundhall). Note that the Finance (No. 3) Act 2011 adjusts taxation laws in respect<br />
of civil partnership.<br />
Civil Partnership Act 2004, s.253.<br />
54
general, that is, non-life insurance, it would be advisable to stipulate that an otherwise valid contract of<br />
insurance should not be defeated solely because the insured lacks a legal or equitable interest in the<br />
subject matter of the contract of insurance. These two recommendations can stand or fall separately, but<br />
these recommendations beg the question about whether the insurable interest requirement, such as it is,<br />
should remain a part of Irish law.<br />
2.90 A broad approach to this question would start from the position that, at common law, there was<br />
no insurable interest requirement. The 1774 Act, as adopted into Irish law in 1866, has been held only to<br />
apply to life insurance. Property insurance does not require a statutory insurable interest to be shown.<br />
Indemnity insurance contains its own mechanism to control fraudulent claims and over-insurance, that is<br />
the indemnity principle. If the formalities provisions in the 1774 Act remain valid, they should be reenacted<br />
in a modern statute. If gambling is to be regulated, it should be regulated via a gaming statute.<br />
If insurance is to be distinguished from other financial transactions, an insurable interest concept or<br />
requirement is an unsatisfactory way of doing so. In sum, there is no need to retain any insurable interest<br />
requirement.<br />
2.91 In contrast, a narrow approach to the statutory insurable interest requirement would start from<br />
the position that the insurable interest, at least in life policies, remains a useful protection against<br />
gambling or moral hazard, it is in need of reform.<br />
(1) Proposals for <strong>Reform</strong> – A Broad or Narrow Approach?<br />
2.92 There is a considerable degree of consensus in favour of widening the categories of person<br />
who may be able to assert an insurable interest in relation to the natural love and affection route towards<br />
meeting the insurable interest requirement. As the <strong>Law</strong> <strong>Commission</strong>s point out, the New York position<br />
allows a court to rule that any person who has a close relationship, by blood or by law, may thus possess<br />
an insurable interest in another person‘s life. This right extends to the insurance contract being available<br />
for unlimited and stipulated amounts of money, as distinct from being pegged to the insurable interest per<br />
se. The <strong>Law</strong> <strong>Commission</strong>s, while mentioning this as a possible approach tentatively inclined towards the<br />
Canadian and previously proposed Australian model of setting out persons in defined relationships.<br />
―We tentatively propose that the following groups should be deemed to have insurable an<br />
interest arising out of natural affection:<br />
(1) any person – in his or her own life and in the life of his or her spouse or civil partner;<br />
(2) any person who is cared for and dependent on his or her parent or guardian – in the life<br />
of his or her parent or guardian;<br />
(3) any parent – in the life of his or her adult child;<br />
(4) any person – in the life of his or her cohabitant.‖ 163<br />
2.93 The <strong>Commission</strong> considers this proposal to represent a modest and worthwhile restatement<br />
and expansion of the law, reflecting contemporary developments in terms of social policy (eg recognition<br />
of the rights of carers) and the fact that many persons are in cohabitation relationships. However, there<br />
will have to be some attention paid to defining persons in a cohabitating relationship, which the<br />
<strong>Commission</strong> assumes, is to include same-sex cohabitionship. For this purpose the <strong>Commission</strong> refers to<br />
the definition of ―cohabitants‖ in the Civil Partnership and Certain Rights and Obligations of Cohabitants<br />
Act 2010, which implemented the key elements of the <strong>Commission</strong>‘s 2006 Report on the Rights and<br />
Duties of Cohabitants. 164<br />
2.94 A related question that the <strong>Law</strong> <strong>Commission</strong>s did not address was the impact that payments<br />
made on the foot of any insurance contract may have in respect of social welfare payments and health<br />
care benefits. Should these payments made under an insurance contract be seen as a collateral benefit<br />
that is to have no impact on social insurance entitlements such as social assistance payments and<br />
medical benefits? Further, if some insurance payments are to have an impact on social welfare or health<br />
care (eg via means tested assessment mechanisms) how should these two systems of private insurance<br />
163<br />
164<br />
Issues Paper 4, para. 7.62.<br />
<strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong> Report on the Rights and Duties of Cohabitants (LRC 82-2006).<br />
55
and social provision be integrated with each other? The <strong>Commission</strong> has previously considered these<br />
questions from the perspective of how to integrate considerations of legal principle with social justice and<br />
social solidarity: see the <strong>Commission</strong>‘s 2002 Report on Section 2 of the Civil Liability (Amendment) Act<br />
1964. 165 The <strong>Commission</strong> appreciates that our recommendation that an insurable interest is to vest in<br />
cohabitants raises a number of issues that must be considered in broader socio-economic terms but that<br />
such considerations go way beyond the ambit of this Consultation Paper.<br />
2.95 The <strong>Law</strong> <strong>Commission</strong>s, in Issues Paper 4, also invited submissions on what should be done in<br />
respect of other relationships, in particular:<br />
―(1) should parents have an interest in the lives of their children under 18?<br />
(2) should fiancé(e)s have interests in each other‘s lives?<br />
(3) should siblings have interests in each other‘s lives?<br />
(4) should grandparents and grandchildren have interests in each other‘s lives?‖ 166<br />
2.96 The fact that these relationships have been separated from the position pertaining or proposed<br />
by the <strong>Law</strong> <strong>Commission</strong>s in respect of spouses or civil partners, persons cared for and dependant on a<br />
parent or guardian, parents and adult children, and cohabitees, tends towards an implicit assumption that<br />
siblings, for example, are less likely to be in close or supportive relationships than a married couple.<br />
While this may be so in many cases, it is just as foreseeable that two unmarried brothers may form a<br />
dependant relationship that could render some insurance arrangement a prudent and socially desirable<br />
step for them to take. Whether the moral hazard – the possibility that one family or blood relative might<br />
take the life of another for financial gain – is stronger as between married persons than siblings is<br />
presumably a matter of idle speculation but any actuarial information on this and other matters would be<br />
welcome. 167<br />
2.97 The <strong>Commission</strong> provisionally recommends that, in connection with life insurance, the following<br />
should also be deemed to have an insurable interest in the life policy: (a) spouses in relation to each<br />
other; (b) civil partners in relation to each other; (c) cohabitants in relation to each other; (d) a child in<br />
relation to his or her parent or guardian; and (e) a dependant parent in relation to his or her adult child.<br />
2.98 The <strong>Commission</strong> invites submissions as to whether, in connection with life insurance, the<br />
following should also be deemed to have an insurable interest in the life policy: (a) a grandparent in<br />
relation to his or her grandchild; and (b) siblings in relation to each other.<br />
(2) Non Indemnity <strong>Insurance</strong> and the Insurable Interest<br />
2.99 Non indemnity insurance, that is insurance which pays a fixed sum upon the risk materialising,<br />
is generally associated with life policies but property insurance of many kinds is also effected on a non<br />
indemnity basis. As Irish law does not currently contain an insurable interest requirement, the 1774 Act<br />
not applying outside the area of life cover, an argument would have to be made for legislating for the<br />
introduction of an insurable interest requirement to be introduced in non indemnity, non life insurance.<br />
The only basis upon which such an argument can proceed revolves around either that of moral<br />
hazard/deterrence, or public policy considerations that proscribe gambling. In the <strong>Commission</strong>‘s view,<br />
neither of these considerations necessitate the introduction of an insurable interest requirement where it<br />
does not currently exist.<br />
(3) Moral hazard/deterrence<br />
2.100 The argument that an insurance claim should only be honoured when the claimant can show<br />
an insurable interest in order to deter fraud, or moral hazard, does not make very much sense. The<br />
arsonist who has no interest in a property but who has an insurance policy in relation to that property<br />
might fall under a greater degree of suspicion than any householder or property owner who has such an<br />
165<br />
166<br />
167<br />
<strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong> Report on Section 2 of the Civil Liability (Amendment) Act 1964 (LRC 68-2002).<br />
Issues Paper 4, para. 7.64.<br />
The <strong>Law</strong> <strong>Commission</strong>s in their recently published Joint Consultation Paper 2011: Post Contractual Duties and<br />
Other Issues, support broadening the categories of persons who may insure the life of another.<br />
56
interest. Furthermore, the liberal interpretation placed upon the requirement in some of the pre Church<br />
and General <strong>Insurance</strong> Co v Connolly 168 decisions such as Brady v Irish Land <strong>Commission</strong> 169 and Coen v<br />
Employers Liability Assurance Co 170 suggests that, as a threshold test, there is no effective purpose to be<br />
served by insisting upon an insurable interest requirement; illegality, and fraud are more likely to<br />
constitute effective barriers to an improperly constituted insurance claim. The <strong>Commission</strong> believes that<br />
legislation directed at preventing criminals from profiting form criminal acts such as the Proceeds of Crime<br />
Act 1996 171 and the Criminal Justice (Theft and Fraud Offences) Act 2001 172 represent a more direct and<br />
effective means of dissuading persons from engaging in criminal activity, while at the same time allowing<br />
due process to be observed. 173 Similar considerations suggest to the <strong>Commission</strong> that Irish Society is<br />
less concerned with the distinction between gaming and wagering on the one hand, and insurance and<br />
other financial products on the other. The National Lottery, scratch cards, on-course and off-course<br />
betting on horses and greyhounds, as well as the explosion in spread betting and betting exchanges<br />
suggest that the issue is not whether to facilitate such activities as a part of the leisure industry; rather,<br />
the question is how best to regulate activities that often straddle the boundary between recreational<br />
wagering and financial investment activities. This question goes beyond the scope of the current analysis<br />
of insurance contract law. Nevertheless the <strong>Commission</strong> does not see any case for introducing an<br />
insurable interest requirement (in the traditional Macaura sense) in non-indemnity insurance that does not<br />
involve life insurance.<br />
2.101 It certainly is arguable that the Life Assurance Act 1774 no longer serves any useful purpose.<br />
As the Australian <strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong> graphically put it:<br />
―The legislative requirements relating to the interest which an insured must have in the subject<br />
matter of an insurance contract are the result of a combination of imprecise drafting and<br />
historical accident rather than coherent implementation of clear legislative policy... Even in<br />
1774, there was no reason why that Act should extend to contracts of indemnity, since the<br />
nature of such a contract prevents gaming and wagering in the form of insurance.‖ 174<br />
2.102 The Gaming Act 1845, 175 which was repealed and replaced by the Gaming and Lotteries Act<br />
1956, provided the most obvious means of counteracting wagering contracts that were dressed up as<br />
insurance transactions, and although the 1956 legislation is generally regarded as in need of root and<br />
branch reform, the provision in section 36(1), which provides that every contract by way of gaming or<br />
wagering is void, still can provide a sound basis for regulating the boundary between wagering and<br />
insurance contracts under Irish law.<br />
2.103 In Byers v Beattie 176 Shares were purchased by the plaintiffs on the foot of an agreement that if<br />
a resale was effected on disadvantageous terms, the plaintiffs would be entitled to the difference and<br />
commission and other charges from the defendant. The transaction was held to be void as a wager.<br />
Even where an insurable interest is evident, the Irish courts are able to identify undesirable transactions<br />
168<br />
169<br />
170<br />
171<br />
172<br />
173<br />
174<br />
175<br />
176<br />
High Court, 7 May 1981. See MacGillivray, para. 1.-044 for the contrasting British position.<br />
[1921] 1 IR 56.<br />
[1962] IR 314.<br />
Section 2 (interim orders), as amended by the Proceeds of Crime (Amendment) Act 2005.<br />
For example, section 6 (making a gain or causing a loss by deception).<br />
Contrast the situation where the insurer declines to honour a policy merely upon suspicion of fraud or<br />
destruction of property by the insured. Both the <strong>Insurance</strong> Ombudsman of Ireland and the Financial Services<br />
Ombudsman have held such powers to be incompatible with the Constitution of Ireland: see the discussion<br />
below.<br />
ALRC Report 1982, para 117.<br />
8 & 9 Vict,. c.109. The Gaming and Lotteries Act 1956 also repealed the Gaming Act 1892, re-enacting the<br />
terms of s.1 of the 1892 Act in section 36(1). For a recent decision on restitutionary remedies being available<br />
notwithstanding s.1 of the 1892 Act, see Close v Wilson [2011] EWCA Civ 5.<br />
(1870) IR 1 CL 209; Morgan Grenfell & Co v Welwyn Hatfield District Council [1995] 1 All ER 1.<br />
57
and deny enforceability. The leading case is Wall and Wall v The New Ireland Assurance Co. 177 the<br />
plaintiff, with the connivance of agents of the defendant insurance company, took out a number of policies<br />
in his own name or the life of his mother, ostensibly under section 50(1)(a) of the 1936 Act, that is, to<br />
cover reasonable expenses in connection with the death and funeral of his mother. The first two policies<br />
were regarded as being potential losses, given the premiums and his mother‘s longevity, so three<br />
additional policies were taken out as a form of insuring himself against such a remote loss on the first two<br />
policies. While the five policies in question produced an assured sum that would not in itself have been<br />
regarded as an unreasonable amount, the Supreme Court endorsed the trial judge‘s view that these later<br />
three policies were gaming policies and therefore illegal under section 1 of the 1774 Act. The Supreme<br />
Court also reasoned that it was possible to approach this case from the perspective of illegality even<br />
through, on the facts, knowledge of the illegal purpose as between the proposer and the insurer‘s agents<br />
could not be attributed to the insurer. Walsh J, giving the main judgment for the Supreme Court 178 stated:<br />
―It does not appear to me that an insurance company should, nor is it contended for by the<br />
respondents in this case, in the absence of knowledge on its own part be at the mercy of the<br />
secret and undisclosed intentions of the person effecting such a policy of insurance if, on the<br />
face of it, the transaction is legal. If, therefore, the plaintiff, Mark Wall, while ostensibly<br />
effecting these five policies for the purpose of funeral expenses had the secret intention of<br />
using three of them as a form of insuring himself against financial loss on the first two policies,<br />
that fact or intention alone would not, even if proved to exist at the time, invalidate or render<br />
illegal the policy. On the other hand I am satisfied that if it can be proved not merely that the<br />
plaintiff had that intention but had communicated that intention to the Assurance Company or if<br />
the Company had actual or imputed knowledge of that intention at the time the policy was<br />
effected, the policy would, notwithstanding its ostensible purpose, be illegal.‖<br />
(4) Pleas of illegality<br />
2.104 While public policy considerations are sometimes used to explain why the law requires an<br />
insurable interest to be shown by an insured – ―if the insured was not to have a property at the time of the<br />
insurance or loss, any one might insure another‘s house, which might have a bad tendency to burning<br />
houses‖ 179 – it should be noted that the insurable interest requirement is not the only means of deterring<br />
fraudulent claims based on deliberate acts of destruction, for example. An assured cannot recover on the<br />
foot on an insurance policy in respect of a loss caused by this own criminal or tortious act. 180 If the<br />
deliberate act has caused a loss which is the natural or probable result of that act then the necessary<br />
causal element will be present: Hardy v Motor Insurer‟s Bureau. 181 Clearly in cases where the insured is<br />
found by a court to have deliberately set fire to his property there can be no right to enforce a fire<br />
insurance policy, eg Michovsky v Allianz, 182 but the High Court ruled, in Gray v Hibernian Assurance<br />
Co, 183 a case in which the (deceased) insured was suspected of having commissioned others to set fire to<br />
his Dundalk public house, that the onus rests on the insurer to show the illegal bargain. The fact that in<br />
177<br />
178<br />
179<br />
180<br />
181<br />
182<br />
183<br />
[1965] IR 386.<br />
Ó Dalaigh CJ, Walsh, Lavery, Kingsmill Moore and Haugh JJ.<br />
Lord Chancellor Hardwicke in Sadler‟s Company v Badcock (1743) 1 Wils KB 8.<br />
See generally MacGillivray, <strong>Insurance</strong> <strong>Law</strong> 11 th ed (Sweet & Maxwell 2008) Chapter 14.<br />
[1964] 2 QB 745. Even negligent conduct causing loss may be caught in certain instances: Gray v Barr<br />
[1971] 2 Q.B. 554. On moral hazard and Gray v Barr situations in South Africa, see Van Niekerk, ―The<br />
Bloody-handed, Homicidal Beneficiary and the Materialisation of the Life <strong>Insurance</strong> Risk‖ (2009) 21SA Merc<br />
LF 126, distinguishing international conduct and unlawful or wrongful conduct, citing Ellison Kahn, Bloody<br />
Hand! Wills and Crime (2003).<br />
[1964] IEHC 43.<br />
High Court, 27 May 1993. For a decision of the Financial Services Ombudsman see July-December 2006<br />
Complaints. Here, an insurer refused to honour an accident cash plan, suspecting the injury had occurred in<br />
the cause of an illegal act. No criminal proceedings were possible. Applying Articles 34.1 and 38.1 of the<br />
Constitutioon, the Ombudsman directed the insurer to pay the claim.<br />
58
these kind of cases the owner of the property clearly has an insurable interest suggests that it is through<br />
illegality or public policy considerations – ex turpi causa non oritur actio – that moral hazard dangers are<br />
most effectively addressed. Any reduction in insurable interest requirements will have no effect on moral<br />
hazard considerations which, the <strong>Commission</strong> believes, can be effectively addressed without the need to<br />
retain any insurable interest requirement. It is also arguable that because public policy and common law<br />
illegality doctrines contain a degree of flexibility – certainly in contrast to s.1 of the 1774 Act which<br />
declares the contract ―to be null and void to all intents and purposes whatsoever‖ – the judiciary is better<br />
able to respond to the individual facts and circumstances of borderline cases. Two Canadian decisions<br />
illustrate this point. 184<br />
(5) Options for reform under the <strong>Law</strong> <strong>Commission</strong>s Issues Paper – the regulatory definition<br />
question<br />
2.105 As has been shown, Irish law differs radically from English law insofar as the Irish courts have<br />
ruled that an insurable interest is not a common law requirement and that the 1774 legislation only<br />
applies to contracts of life assurance. In the Insurable Interest Issues Paper the <strong>Law</strong> <strong>Commission</strong>s ask<br />
whether an insurable interest is necessary in order to identify and distinguish insurance from other<br />
products which lack an insurable interest. The <strong>Law</strong> <strong>Commission</strong>s concluded that the retention of a strict<br />
insurable interest requirement is unnecessary for regulatory purposes.<br />
2.106 The Financial Services and Markets Act 2000, the governing UK legislation, does not define a<br />
contract of insurance but deems contracts listed in a statutory instrument to be contracts of insurance. In<br />
relation to certain types of financial product, regulatory agencies and representative bodies such as the<br />
International Swaps and Derivatives Association have avoided the temptation to review the boundary<br />
between insurance and other financial products on the ground that such a scrutiny could damage market<br />
consensus and undermine confidence in economically significant products, particularly when the market<br />
does not see such products as gambling activities. 185 The <strong>Law</strong> <strong>Commission</strong>s concluded that the<br />
Financial Services Authority regard the ―assumption of risk by the [service] provider‖ as the key factor in<br />
identifying insurance for regulatory purposes; this factor however is not the same as the statutory<br />
insurable interest requirement under English law.<br />
2.107 In terms of identifying insurance itself for regulatory proposes, the <strong>Law</strong> <strong>Commission</strong>s<br />
emphasise that the three key factors in Scots law and English law concur: they are requirements of<br />
payment, uncertainty and interest. The <strong>Law</strong> <strong>Commission</strong>s conclude that both the Scottish and the<br />
English Courts require the insured to have an interest in the subject matter of the contract. However, the<br />
<strong>Law</strong> <strong>Commission</strong>s are of the view that the leading cases do not equate such an interest with a pecuniary<br />
loss recognised by law: ―it is an interest in something so that one would be adversely affected if it were to<br />
be lost.‖ 186<br />
2.108 The <strong>Law</strong> <strong>Commission</strong>s conclude that ―interest loosely defined does play a role in distinguishing<br />
insurance from other contracts although staturoty insurable interest...does not‖. The <strong>Law</strong> <strong>Commission</strong>s<br />
refer to tax guidance and <strong>Insurance</strong> Premium Tax requiring an insurable interest, which is described as ―a<br />
financial or other loss on the happening of the isured event.‖ This definition looks more like the legitimate<br />
expectation test as canvassed in the Kosmonpoulos decision in Canada. While this test may be required<br />
under fiscal and other statutes for accountancy and tax purposes, it is not to be equated with a statutory<br />
insurable interest: in other words, these important governance and regulatory functions would not be<br />
subverted if a statutory insurable interest requirement were to be removed from the UK statute book.<br />
184<br />
185<br />
186<br />
If the ―moral hazard‖ materialises and public policy prevents a spouse who has murdered his or her spouse<br />
from recovering, should proceeds from the policy to the benefit of the estate of the murdered spouse? Should<br />
public policy allow a windfall benefit to the insurer? See Brissette Estate v Westbury Life <strong>Insurance</strong> Co [1992]<br />
3 SCR 87 and Oldfield vTransamerica Life <strong>Insurance</strong> (2002) 210 DLR (4 th ) 1.<br />
For an interesting review of the boundary under UK and Irish law see Devaney, ―Gambling‘s Changing Face –<br />
Do new forms of gambling pose a new regulatory challenge?‖ [2009] CLP 28.<br />
Para 7.20. See the example given in para 7.24.<br />
59
(6) Defining <strong>Insurance</strong> <strong>Contracts</strong> in Irish <strong>Law</strong><br />
2.109 The leading Irish decision is International Commercial Bank plc v <strong>Insurance</strong> Corporation of<br />
Ireland plc. 187 The case concerned a credit guarantee insurance agreement whereby ICI provided an<br />
indemnity if (as happened) a company that borrowed monies from the plaintiff bank defaulted on the loan.<br />
ICI resisted the claim on the grounds that the contract was one of credit insurance and as such caught by<br />
uberrimae fidei. Failure by the bank to disclose certain material facts gave ICI, the defendant, a right to<br />
avoid the policy. Blayney J, following Seaton v Heath 188 found the contract was one of guarantee, not<br />
insurance. Blayney J, looked at the question by reference to the substance of the case. In Seaton v<br />
Heath Romer LJ had said:<br />
―<strong>Contracts</strong> of insurance are generally matters of speculation where the person desiring to be<br />
insured has means of knowledge as to the risk, and the insurer has not the means or not the<br />
same means. The insured generally puts the risk before the insurer as a business transaction,<br />
and the insurer on the risk stated fixes a proper price to remunerate him for the risk to be<br />
undertaken; and the insurer engages to pay the loss incurred by the insured in the event of<br />
certain specified contingencies occurring. On the other hand, in general, contracts of<br />
guarantee are between persons who occupy, or ultimately assume, the positions or creditor,<br />
debtor, and surety, and thereby the surety becomes bound to pay the debt or make good the<br />
default of the debtor. In general, the creditor does not himself go to the surety, or represent, or<br />
explain to the surety, the risk to be run. The surety often takes the position from motives of<br />
friendship to the debtor, and generally not as the result of any direct bargaining between him<br />
and the creditor, or in consideration of any remuneration passing to him from the creditor. The<br />
risk undertaken is generally known to the surety, and the circumstances generally point to the<br />
view that as between the creditor and surety it was contemplated and intended that the surety<br />
should take upon himself to ascertain exactly what risk he was taking upon himself. 189<br />
2.110 In an article on the legal nature of credit default swaps, 190 Smith argues that by focusing on the<br />
substance of credit default swaps, that is, that the payment obligation under a credit derivative is not<br />
conditional on the payee‘s loss, 191 it is possible to avoid both the conclusion that a credit default swap is<br />
not indemnity insurance and the rather inconvenient result that uberrimae fidei duties attach thereto. The<br />
<strong>Commission</strong> has been advised that these issues of form and substance, unsatisfactory as they are, are<br />
approached in an identical manner in Ireland, that is, precise definition and classifications are eschewed.<br />
In any event, this point is of much less importance in Ireland because the Life Assurance Act 1774, a<br />
source of some mischief in this context in the United Kingdom 192 is confined to life policies in this<br />
jurisdiction.<br />
(7) The insurance/gaming divide – current review of gambling legislation<br />
2.111 The Department of Justice and Equality is currently (November 2011) engaged in a major<br />
review of Irish gambling law, currently regulated by the Gaming and Lotteries Act 1956, with a view to<br />
developing ―a new and comprehensive legal and organisational framework governing the gambling<br />
architecture in the State.‖ 193 Building on the Report of the Casino Committee Report, Regulation Gaming<br />
in Ireland 194 the then Minister announced that one of the premises that most modern gambling codes are<br />
187<br />
188<br />
189<br />
190<br />
191<br />
192<br />
193<br />
194<br />
[1991] ILRM 726.<br />
[1899] 1QB 782.<br />
At p.792-3.<br />
Smith, ―The Legal Nature of Credit Default Swaps‖ [2010] LMCLQ386 at 409.<br />
The so called Post Option: see generally Castignini, Derivatives: The Key Principles 3rd ed (Oxford University<br />
Press 2009).<br />
Smith, ―The Legal Nature of Credit Default Swaps‖ [2010] LMCLQ 386 at 409.<br />
Response of the Minister for Justice to a Parliamentary Question, October 7, 2010.<br />
Available at www.justice.ie.<br />
60
uilt upon is ―that gambling is kept free of crime.‖ 195 The <strong>Commission</strong> expects that the ―complex and<br />
comprehensive legislation‖ 196 that may arise in the future may not address the insurance/gambling<br />
dichotomy directly. In the most recent discussion document the Department of Justice and Equality<br />
observe that any new regulatory architecture for gambling will pursue three central objectives:<br />
that young people and the vulnerable are protected;<br />
that gambling should in all respects be fairly and openly conducted<br />
that gambling is kept free from crime.<br />
2.112 It is a central point in the discussion document to note that the emphasis is on better<br />
regulation, not deregulation. This observation, in relation to gambling policy, also holds true in relation to<br />
the <strong>Commission</strong>‘s recommendations in relation to reform of the insurable interest rules. It is of interest to<br />
note that many of the central recommendations in relation to changing the gambling regulation<br />
architecture – the creation of a regulatory authority, licensing of operators with strict compliance rules, a<br />
power vested in the Minister to fine-tune rules by way of secondary legislation – resemble the insurance<br />
regulation landscape as it currently exists. Because it is to be a feature of gambling reform that<br />
definitions of gambling will be written into Irish law for the first time 197 and the statutory rules preventing<br />
the enforcement of gambling contracts will not be continued, 198 a co-ordinated but not integrated<br />
approach to insurance and gambling regulation will be required. Commercial and cultural developments<br />
such as the expansion of betting exchanges and spread betting illustrate that certain types of risk hedging<br />
or avoidance will straddle the boundary between gaming regulation and insurance/financial services<br />
authorisation. 199<br />
2.113 Currently, spread betting and <strong>Contracts</strong> for Difference products (CFDs) are regulated by the<br />
Central Bank of Ireland, and press reports in 2011 200 indicate that compliance with regulatory<br />
requirements in Ireland are not being fully met by the 29 companies that are approved to offer such<br />
products within the State. These matters are seen as consumer protection matters rather than moral<br />
hazard issues and attest to the fact that any insurable interest requirement, as a legislative proxy for<br />
counteracting socially undesirable contracts of speculation, has no part to play in modern Irish law.<br />
195<br />
196<br />
197<br />
198<br />
199<br />
200<br />
Response of the Minister to a Parliamentary Question, October 7, 2010.<br />
Ibid.<br />
Options for Regulating Gambling (December 2010).<br />
Paras 2.8 and 3.8.<br />
Para 3.34. See Devaney [2009] CLP 28.<br />
Eg. ―Spread-bet firms may face regulator enforcement‖ The Irish Times 16 June 2011. Regulation by means<br />
of bookmakers‘ licences and the Markets in Financial Instruments Directive (2004/39/EC) could be described<br />
as patchy at best, with consumer protection being limited to financial spread betting.<br />
61
3<br />
CHAPTER 3<br />
DUTY OF DISCLOSURE<br />
A<br />
Introduction<br />
3.01 The duty of a proposer to volunteer information to an insurer when that information would<br />
appear to a prudent insurer to be material to a decision whether to accept the risk, and on what terms, is<br />
long-established. In this Chapter, the <strong>Commission</strong> notes that the duty of disclosure is mandated by both<br />
the common law and the Marine <strong>Insurance</strong> Act 1906 as being applicable to all insurance contracts. The<br />
duty is rooted in ―special knowledge‖ of a risk as being likely to be solely in the possession of the<br />
proposer. Whether this remains the case is open to some doubt in the light of telecommunications and<br />
other advances. The duty has always been balanced by reference to the insurer‘s duty to disclose and<br />
investigate circumstances within the insurer‘s competence and expertise. In some jurisdictions the duty<br />
of disclosure has been offset or indeed removed altogether by an insurer‘s obligation to ask specific<br />
questions.<br />
B<br />
The Duty of Disclosure in <strong>Insurance</strong> <strong>Contracts</strong><br />
3.02 Under section 18(1) of the Marine <strong>Insurance</strong> Act 1906 (generally regarded as applicable to all<br />
forms of insurance, except in respect of the constructive knowledge issue, discussed below) a person<br />
who is seeking to obtain insurance:<br />
―must disclose to the insurer, before the contract is concluded, every material circumstance<br />
which is known to the assured, and the assured is deemed to know every circumstance, in the<br />
ordinary course of business, ought to be known by him. If the assured fails to make such<br />
disclosure, the insurer may avoid the contract.‖<br />
3.03 The basis upon which the duty of disclosure rests is disparity of information and bargaining<br />
power. Insofar as the proposer may, in the many situations, possess superior knowledge of the facts and<br />
circumstances that attend the risk, particularly those personal to the proposer, it is entirely appropriate<br />
that the proposer should reveal those facts and circumstances to the insurer. In Carter v Boehm 1 Lord<br />
Mansfield contrasted situations where ―special facts‖ are held by one party to a negotiation from instances<br />
where ―either party may be innocently silent, as to grounds open to both, to exercise their judgment<br />
upon‖. Because Lord Mansfield observed that ―insurance is a contract or speculation‖, the law requires<br />
that such ―special facts‖ as either party has access to must not be suppressed. Even if the suppression<br />
were to happen through a mistake, even without fraudulent intent, Lord Mansfield observed that the policy<br />
would be void ―because the risque run is really different from the risque understood and intended to be<br />
run, at the time of the agreement.‖ So, the suppression of factual information, whether fraudulent or<br />
otherwise would allow the insurer to treat the contract as void. Lord Mansfield reasoned that:<br />
―The special facts, upon which the contingent chance is to be computed, lie most commonly in<br />
the knowledge of the insured only; the under-writer trusts to his representation and proceeds<br />
upon confidence, that he does not keep back any circumstance in his knowledge, to mislead<br />
the under-writer into a belief that the circumstance did not exist, and to induce him to estimate<br />
the risque, as if it did not exist.‖ 2<br />
1<br />
2<br />
(1766) Burr 1905; of this case see Watterson, Carter v Boehm in Mitchell and Mitchell, Landmark Cases in the<br />
<strong>Law</strong> of Contract (Hart, 2008). Hasson, in ―The Doctrine of Uberrima Fides in <strong>Insurance</strong> <strong>Law</strong> – A Critical<br />
Evaluation stresses that Lord Mansfield was concerned with ‗fraudulent concealment‘: (1969) 32 MLR 615 at<br />
618. Later judges have lost sight of this.<br />
(1766) Burr 1905, at 1909-10<br />
63
3.04 Carter v Boehm of course is also at the heart of another cardinal principle of insurance law that<br />
is similarly enshrined in statute law, s.17 of the Marine <strong>Insurance</strong> Act 1906:<br />
―A contract of marine insurance is a contract based on utmost good faith, and, if the utmost<br />
good faith be not observed by either party, the contract may be avoided by the other party.‖<br />
3.05 The utmost good faith principle, and the duty of disclosure,are in most instances linked<br />
together. However, there are cases where judges have stressed that non-disclosure may occur even<br />
though the proposer did not act mala fides. 3 Most traditional jurisprudence however inclines towards<br />
placing the emphasis on the duty of disclosure as a means of protecting the insurer, decoupling the duty<br />
from the wider implications of the (mutual) duty of utmost good faith. 4<br />
3.06 In Manor Park Homebuilders Ltd v AIG Europe (Ireland) Ltd, 5 the proposer for fire insurance in<br />
relation to a property failed to make disclosures in relation to security measures concerning that property.<br />
McMahon J held that these matters were on the facts not material but went on to consider whether the<br />
insurer‘s failure to examine the property or investigate this risk was pertinent in a case of non-disclosure:<br />
―The principle of uberrimae fidei, which applies to all insurance contracts, imposes a heavy<br />
onus of disclosure on the insured. Without this obligation to divulge information frequently<br />
available only to the insured, the insurer would have great difficulty in assessing the risk or in<br />
calculating the premium. This does not, however, mean that the insurer can cover its eyes or<br />
abstain from making normal inquiries or investigations, in the expectation that, in the event of<br />
the risk materialising, it can point to the insured‘s omission and repudiate the contract. The<br />
insured‘s duty is balanced by a reciprocal duty on the insurer to make its own reasonable<br />
inquiries, to carry out all prudent investigations and to act at all times in a professional manner.<br />
In fact the onus to do this, because of its experience and expertise, lies primarily on the<br />
insurer. The law is willing to assist this process by obliging the insured to volunteer information<br />
not easily available to the underwriter and which is material to the risk. The uberrimae fidei<br />
principle applies with the greatest force to situations where the relevant facts are peculiarly<br />
within the knowledge of the insured and are not easily available to the underwriter. Where,<br />
however, the full extent of the risk can readily be defined without the insured‘s participation, the<br />
law does not insist on full disclosure...‖<br />
3.07 The emphasis that this ‗knowledge‘ exception places upon the insurer to follow up on facts that<br />
are disclosed and to carry out an examination of the property, the medical condition of the assured, and<br />
so on, cannot be overstated. American judges have voiced their opposition to an over broad duty of<br />
disclosure on the basis that where a proposal can be examined by the insurer, a duty of disclosure is<br />
inappropriate. In explaining why Carter v Boehm was never extended into fire insurance underwriting, in<br />
3<br />
4<br />
5<br />
Curran v Norwich Union Life <strong>Insurance</strong> Society [1987] IEHC 5. Irish case law, however, particularly in relation<br />
to life cover and income protection does treat good faith and non-disclosure as closely related: see Keating v<br />
New Ireland <strong>Insurance</strong> Co [1990] 2 IR 383 and Coleman v New Ireland <strong>Insurance</strong> Co [2009] IEHC 273.<br />
See generally MacDonald Eggers, Picken and Foss, Good Faith and <strong>Insurance</strong> <strong>Contracts</strong> (3rd ed) (2010)<br />
(Eggers, et al): Bennet, “Mapping the Doctrine of Utmost Good Faith in <strong>Insurance</strong> <strong>Law</strong>” [1999] LMCLQ 165;<br />
Bennett Reflections on Values in Soyer, <strong>Reform</strong>ing Marine and Commercial <strong>Insurance</strong> <strong>Law</strong> (Informa <strong>Law</strong><br />
2008); Bridge, “Does Anglo-American Contract <strong>Law</strong> need a doctrine of Good Faith” (1984) 9 Can Bus LJ 385.<br />
Butcher, in “Good Faith in <strong>Insurance</strong> <strong>Law</strong>: A Redundant Concept?” [2008] JBL 375 argues that the doctrine<br />
has led to ―serious problems‖ such as the development of a series of structured rules emerging from a<br />
sweeping principle, the unfair operation of the sole remedy of recission, the vagueness of the law and<br />
uncertainty as to the scope of the doctrine. Butcher prefers statutory reform of insurance contract law, opining<br />
that such reforms would render the good faith principle otiose. The <strong>Commission</strong> has much sympathy with this<br />
approach.<br />
[2009] 1 ILRM 190. See Ahern, ‗The Formation of <strong>Insurance</strong> <strong>Contracts</strong> and the duty of Insurers‘ [2009] CLP<br />
84.<br />
64
the Ohio case of Hartford Protection <strong>Insurance</strong> Co v Harmes 6 it was said that there is no need to impute a<br />
need for reliance on information from the proposer:<br />
―in fire insurance no such necessity for reliance exists, and, if the underwriter assumes the risk<br />
without taking the trouble to either examine, or inquire, he cannot very well, in the absence of<br />
all fraud, complain that it turns out to be greater than he anticipated.‖ 7<br />
3.08 These remarks were made as long ago as 1853. As such, the decision of McMahon J in<br />
Manor Park Homebuilders Ltd v AIG Europe (Ireland) Ltd, also a fire insurance case, in which the insurer<br />
failed to inspect the property or follow up on information provided, resonates across the centuries.<br />
McMahon J wrote that ―uberrimae fidei is not a charter for indolent insurers.‖ 8<br />
3.09 In contrast, in Pan Atlantic <strong>Insurance</strong> Co Ltd v Pine Top <strong>Insurance</strong> Co 9 regarded as the leading<br />
modern English case, Lord Mustill, speaking of the importance of Carter v Boehm, stated:<br />
―Whilst it is true that this decision has been criticised on the facts, and that the wide general<br />
contractual duty of good faith which Lord Mansfield propounded has long since ceased to hold<br />
sway, the courts have never been deflected from the high standard of duty prescribed in this<br />
judgment. The assured is not to keep anything back which goes to the computation of the<br />
‗contingent chance‘, for otherwise there is no ‗fair representation‘, and the underwriter is led to<br />
approach the ‗risk understood to be run‘ on a false basis. Such is the principle on which<br />
insurance law has been developed and insurance contracts made for more than 200 years and<br />
I would do nothing to dilute it now.‖<br />
3.10 Lord Mansfield was seeking to establish a general contractual duty of good faith, not simply a<br />
specific rule that would operate in insurance law, but this general duty of good faith has not taken root in<br />
the common law world. 10 As such, the duty of disclosure in contracts of insurance has been classified as<br />
a contract uberrimae fidei, a contract of ‗utmost good faith‘, and, along with a diverse but expanding range<br />
of sui generis contracts, 11 is regarded as an exception to the caveat emptor or caveat venditor<br />
approaches to contractual liability.<br />
3.11 The stricter view is that the duty of disclosure does not depend on the proposer‘s awareness of<br />
the existence of the duty. The proposer is under a duty to disclose material facts, even if the insurer or a<br />
broker fails to ask questions or the insurance is negotiated without the use of a proposal form. 12 Even if<br />
questions are asked the proposer must still disclose material facts that the questions might not have<br />
alluded to (subject to the possibility of a waiver or a similar argument). The question, what is a material<br />
circumstance, requires the proposer to have an awareness of the factors that would be relevant to an<br />
insurer, even if the insurer has not explained the insurer‘s business or prompted the proposer in any way.<br />
The Marine <strong>Insurance</strong> Act 1906 directs in section 18(2) that ―every circumstance is material which would<br />
influence the judgment of a prudent insurer on fixing the premium, or determining whether he will take the<br />
risk‖. This test was endorsed by Kenny J on behalf of a unanimous Supreme Court, in a case of property<br />
insurance, 13 thus indicating that the test has a horizontal effect across all insurance contracts, with the<br />
possible exception of life policies and the like other policies (eg income protection cover).<br />
6<br />
7<br />
8<br />
9<br />
10<br />
11<br />
12<br />
13<br />
2 Ohio St. 452 (1853).<br />
Cited with approval by the ALRC in Report No 20 <strong>Insurance</strong> <strong>Contracts</strong> para 176 (1982). The commercial<br />
benefits undertaking surveys in property insureance cases from a broker‘s perspective, is underlined by Cole<br />
in ― A Practitioner‘s Perspective on Placement duties of <strong>Insurance</strong> Brokers and Reflections on the Proposal of<br />
the <strong>Law</strong> <strong>Commission</strong>s‖, in Soyer, <strong>Reform</strong>ing Marine and Comercial <strong>Insurance</strong> <strong>Law</strong>, (Informa <strong>Law</strong> 2008) Ch 5.<br />
[2009] 1 ILRM 190 at 213.<br />
[1994] 3 All ER 581 at 605; Bennett, ―Utmost Good Faith in the House of Lords‖ (1995) 111 LQR 181.<br />
See generally Zimmermann and Whittaker (eds), Good Faith in European Contract <strong>Law</strong> (CUP, 2000).<br />
See Chapter 2 of Eggers et al.<br />
See generally MacGillivray, paras 17-017 to 17-021.<br />
Chariot Inns Ltd v Assicurazioni Generali Spa [1981] IR 199, at 226. See below para 3.19.<br />
65
3.12 On the question of whether the proposer is to be fixed with constructive knowledge of facts that<br />
the proposer ought to have discovered had he or she undertaken reasonable inquiries, section 18(1) of<br />
the Act is generally regarded as providing a specific rule for business insurance, the section directs that<br />
―the assured is deemed to know every circumstance which, in the ordinary course of business, ought to<br />
be known by him‖.<br />
3.13 In cases of health insurance and similar insurance areas Irish case-law suggests that a<br />
distinction is to be drawn between cases where the proposer honestly believes that a symptom, medical<br />
episode, or medical condition has, or will have, no serious or long lasting consequences, from situations<br />
where the proposer simply is unaware of the medical condition. In this first situation, cases such as<br />
Curran v Norwich Union Life <strong>Insurance</strong> Society 14 suggest that if the symptoms being experienced by<br />
individuals have alerted a medical practitioner to prescribe medication, for example, this would be enough<br />
to trigger a duty of disclosure, even if the patient does not believe the suspected illness is likely to<br />
manifest itself or develop into a serious medical condition. In contrast, the fact that the individual is not<br />
made aware of the prognosis will not constitute non-disclosure: Coleman v New Ireland Assurance plc. 15<br />
In the decision of the Supreme Court, in a leading life insurance case, Keating v New Ireland Assurance<br />
Company 16 a policy of life insurance was executed in June 1985. At a medical examination that took<br />
place prior to the policy being concluded the life in question disclosed that he had received treatment for a<br />
gastric disorder two months previously and the he had been prescribed medication. The life in question<br />
did not know what his underlying condition was and that the medication was used in treating angina<br />
pectoris, not a gastric disorder. The condition led to the death of the individual some five months later.<br />
The insurer declined to pay up on the policy on the grounds of non-disclosure, the argument centring on<br />
the fact that in undergoing tests investigating the gastric disorder, an angiogram and ECG test were<br />
undertaken. McCarthy J observed that while the doctors treating the patient were aware of his heart<br />
condition, the patient was not:<br />
―The insurers were not informed of these material facts; was it a non-disclosure? One cannot<br />
disclose what one does not know, albeit that this puts a premium on ignorance. It may well be<br />
that wilful ignorance would raise significant other issues; such is not the case here. If the<br />
proposer for life insurance has answered all the questions asked to the best of his ability and<br />
truthfully, his next-of-kin are not to be damnified because of his ignorance or obtuseness which<br />
may be sometimes due to a mental block on matters affecting one‘s health.‖ 17<br />
3.14 In Aro Road and Land Vehicles Ltd v <strong>Insurance</strong> Corporation of Ireland 18 McCarthy J also<br />
limited the duty of disclosure by reference to the underlying good faith standard. In this case the proposer<br />
failed to disclose criminal convictions that had been secured against him some 19 years previously, the<br />
insurance being property insurance obtained over the telephone, in circumstances of some urgency,<br />
without detailed questioning of the proposer or the use of a proposal form. After invoking the utmost good<br />
faith standard McCarthy J asked:<br />
―how does one depart from such a standard if reasonably and genuinely one does not consider<br />
some fact material; how much the less does one depart from such a standard when the failure<br />
to disclose is entirely due to a failure of recollection? Where there is no spur to the memory,<br />
where there is no proposal form with its presumably relevant questions, how can a failure of<br />
recollection lessen the quality of good faith?‖ 19<br />
3.15 McCarthy J also seems to have considered the underwriter to have forfeited the right to insist<br />
upon full disclosure in circumstances where the proposer is not questioned about a particular matter, on<br />
14<br />
15<br />
16<br />
17<br />
18<br />
19<br />
[1987] IEHC 5. See also Lindenau v Desborough (1828) 8 B&C.586.<br />
[2009] IEHC 273. See also Zeller v British Companion <strong>Insurance</strong> Co [2008] UKPC 4.<br />
[1990] 2 IR 383.<br />
Ibid at 392.<br />
[1986] IR 403.<br />
Ibid at 414.<br />
66
the basis that the insurance contract is a contract of good faith on both sides. Similarly, in Kelleher v Irish<br />
Life Assurance Company 20 the terms of the proposal form, which intimated that the policy would issue on<br />
the basis of a ―medical free offer‖ dispensed with a duty of disclosure.<br />
3.16 In contrast to Aro Road (and it should be said that in Aro Road Walsh J and Hederman J<br />
concurred with the more radical approach articulated by McCarthy J), a more traditional view of the duty<br />
of disclosure was expressed by the Supreme Court in Chariot Inns Ltd v Assicurazioni General Spa. 21<br />
Kenny J, giving judgment for a unanimous Supreme Court, stated:<br />
―A contract of insurance requires the highest standard of accuracy, good faith, candour and<br />
disclosure by the insured when making a proposal for insurance to an insurance company. It<br />
has become usual for an insurance company to whom a proposal for insurance is made to ask<br />
the proposed insured to answer a number of questions. Any misstatement in the answers<br />
given, when they relate to a material matter affecting the insurance, entitles the insurance<br />
company to avoid the policy and to repudiate liability if the event insured against happens. But<br />
the correct answering of any questions asked is not the entire obligation of the person seeking<br />
insurance: he is bound, in addition, to disclose to the insurance company every matter which is<br />
material to the risk against which he is seeking indemnity.<br />
What is to be regarded as material to the risk against which the insurance is sought? It is not<br />
what the person seeking insurance regards as material, nor is it what the insurance company<br />
regards as material. It is a matter or circumstance which would reasonably influence the<br />
judgment of a prudent insurer in deciding whether he would take the risk, and, if so, in<br />
determining the premium which he would demand. The standard by which materiality is to be<br />
determined is objective and not subjective.‖ 22<br />
C<br />
Constructive Knowledge and Non-disclosure<br />
3.17 Section 18(1) of the Marine <strong>Insurance</strong> Act 1906, for business insurance, broadens the duty of<br />
disclosure to facts which ought to have been known by the proposer. The <strong>Commission</strong> believe that this is<br />
a difficult standard to operate. It is arguable that a better approach may be to ask whether the proposer<br />
should, in those circumstances, have made the disclosure in question. This is a less mechanistic test.<br />
Nevertheless, the <strong>Commission</strong> recognise that such an approach is not widely favoured, even within<br />
circles that are pressing for reform of the duty of disclosure. The <strong>Commission</strong> give two examples. The<br />
pattern set by the PEICL and some of the recent reform proposals from other common law jurisdictions<br />
suggest that the duty of disclosure should apply to<br />
―circumstances of which he is or ought to be aware‖, 23 and/or<br />
―facts which the business insured knew or which it ought to have known.‖ 24<br />
3.18 This question of constructive knowledge and the duty to volunteer or disclose facts (as distinct<br />
from answer questions) that the proposer does not know raises difficult, if not metaphysical, issues.<br />
Perhaps the proposer has forgotten previous incidents, particularly incidents that occurred many years<br />
ago. Perhaps the proposer is aware of facts or events but regards them as irrelevant or unimportant. It<br />
may be that the proposer is aware of facts but does not make the connection with other facts or<br />
possibilities that would be highly material to the insurer.<br />
3.19 The decisions of the non-statutory <strong>Insurance</strong> Ombudsman of Ireland provide some compelling<br />
examples of how difficult is may be to draw the line. In one case, the <strong>Insurance</strong> Ombudsman asked<br />
whether a proposer for holiday (cancellation) cover should be taken to know that a parent is terminally ill<br />
20<br />
21<br />
22<br />
23<br />
24<br />
[1993] ILRM 643, following Hair v Prudential Assurance Co Ltd [1983] 2 Lloyd‘s Rep 667.<br />
[1981] IR 199.<br />
Ibid at 226-7.<br />
PEICL, Article 2:101.<br />
<strong>Law</strong> <strong>Commission</strong>s Consultation Paper 2007, para 5.44.<br />
67
(pre-existing medical condition). 25 The <strong>Insurance</strong> Ombudsman held not. In another case, she dealt with<br />
a case in which a prison officer died after he suffered a heart attack while restraining a prisoner. Prior to<br />
taking out a life policy, and while attending the family GP in regard to treatment of his children, he<br />
mentioned one episode of chest pain. The doctor prescribed aspirin and told him to return for an<br />
examination which he did not do. While the <strong>Insurance</strong> Ombudsman felt that this episode of chest pain<br />
was a material fact she recommended a proportionate settlement of 50% be made. The Ombudsman‘s<br />
observations are of interest even though the <strong>Commission</strong> considers that, in terms of the law, the<br />
insurance company acted reasonably; even under the <strong>Commission</strong>‘s proposals in relation to reform of<br />
misrepresentation, the company would be entitled to refuse to meet the claim if the company could show<br />
it would have declined the proposal. The <strong>Insurance</strong> Ombudsman stated:<br />
―On the one hand, the Company‘s position can be appreciated. There is no doubt that a life<br />
assurance underwriter would be interested in the episode of chest pain and that it is, therefore,<br />
a material fact. If made aware of it a prudent underwriter would have required it to be<br />
investigated before offering assurance.<br />
From the layman‘s point of view it is understandable that a person might close his mind to such<br />
an episode and in the absence of renewed symptoms take no further action. Whether there<br />
was only one instance of chest pain and whether the matter had completely left the life<br />
assured‘s mind by the time the application form was being completed is not possible to know.<br />
There is always difficulty where there has been no medical diagnosis. No illness was<br />
diagnosed in this case by the deceased‘s GP. In our day to day lives wehave many symptoms<br />
and only in a minority of instances do we consult a doctor. Occasionally, as it transpired in this<br />
case, the symptoms were an indication of a sinister underlying condition.<br />
Do I, therefore, concede that the Company are legally correct and support their repudiation or<br />
do I acknowledge that the life assured had erased the matter from his mind and being human<br />
did not disclose the ―casual‖ consultation with his doctor.<br />
It was not for me to attempt to retrospectively underwrite this Policy but at the same time, in my<br />
view, further investigation would have led to assurance being offered, but at an increased<br />
premium.‖ 26<br />
3.20 Indeed, the duty of disclosure is capable of producing some singular situations, none more so<br />
than the dispute between Frank Godfrey and Lloyd‘s of London. An exterior wall of Mr Godfrey‘s cottage<br />
in County Meath had a mural of the 1690 Battle of the Boyne painted on it for over 25 years but, ironically,<br />
the Peace Process led to its apparent destruction by arsonists only days after the then Taoiseach and<br />
then Northern Ireland First Minister had launched an official tourism centre nearby in April 2008. Lloyd‘s<br />
of London declined to honour the fire insurance policy taken out by Mr Godfrey on the basis that he had<br />
not disclosed the existence of the mural. 27 In 2009 the Financial Services Ombudsman found against Mr<br />
Godfrey, ruling ―that by virtue of the nature of the subject, [the mural] would have been the source of<br />
some provocation, albeit to a limited number of intolerant individuals.‖ Press reportsindicated that, while<br />
an appeal to the High Court, may be under consideration, a separate fund-raising campaign led to the<br />
mural being re-painted. 28<br />
3.21 The <strong>Commission</strong> considers that the duty to volunteer information can only be seen in the<br />
context of the <strong>Commission</strong>‘s provisional recommendations on the insurer‘s duty to seek information from<br />
proposers in the shape of precise questions being put to a proposer 29 . The IIF Code of Practice on Non<br />
Life <strong>Insurance</strong> states that insurers ―should avoid asking questions which would require knowledge beyond<br />
25<br />
26<br />
27<br />
28<br />
29<br />
Case study 26 of 2000. .<br />
Case study 10, 1999.<br />
See ―<strong>Insurance</strong> Company refuses payout for Battle of the Boyne Cottage‖, Daily Telegraph 23 June 2010.<br />
See ―Drive to rebuild burned-out ‗Boyne‘ Cottage after insurance claim‖, Irish Times 2 February 2010 and<br />
―Mural on cottage ‗will be repainted‘‖, Irish Independent 1 September 2010.<br />
Para. 4.14 below<br />
68
that which the signatory could reasonably be expected to possess‖, suggesting that insurers may seek to<br />
extend s.18(1) beyond business insurers. The <strong>Commission</strong> considers that judicial decisions after Aro<br />
Road satisfactorily resolve these problems in the light of the flexibility of the disclosure test. Indeed, the<br />
<strong>Commission</strong> notes that because Aro Road was written as a marine insurance policy, the Supreme Court<br />
may well have confined s.18(1) to issues of ―wilful ignorance‖ in any event. The <strong>Commission</strong> concludes<br />
that a proposer will be in breach of the pre-contractual duty of disclosure where it can be shown that the<br />
proposer, in applying for insurance cover, remained wilfully ignorant to material facts or circumstances.<br />
This is in line with the decison of the UK Court of Appeal in Economides v Commercial Union 30 where<br />
―failing to disclose what he would have seen if only he had opened his eyes‖ was seen as an example of<br />
actual knowledge and not constructive knowledge.<br />
3.22 The <strong>Commission</strong> provisionally recommends that the pre-contractual duty of disclosure in<br />
insurance contract law should be retained, but that it should (in accordance with authoritative case law in<br />
Ireland) be restricted to facts or circumstances of which the person applying for insurance cover – the<br />
proposer – has actual knowledge; and that the duty of disclosure would not, therefore, extend to every<br />
fact or circumstance which ought to be known by him or her (constructive knowledge). The <strong>Commission</strong><br />
also provisionally recommends that this modified pre-contractual duty of disclosure shall apply to all<br />
insurance, other than Marine, Aviation and Transport (MAT) insurance, which would continue to be<br />
regulated in this respect by the Marine <strong>Insurance</strong> act 1906.<br />
3.23 It is of interest to note that the leading English text, MacGillivray on <strong>Insurance</strong> <strong>Law</strong>, cites<br />
Chariot Inns as articulating ‗the common law test of materiality‘ 31 while the Aro Road decision is not cited<br />
anywhere in the current edition. This difference in perspective clearly holds forth the prospect of an Irish<br />
court being able to limit the duty of disclosure, in circumstances where the underwriter seeks to provide<br />
cover without assisting the proposer in being made fully aware of the existence and scope of the duty<br />
itself. As such, Irish law may not be open to the same level of criticism that Professor Malcolm Clarke<br />
has levied against English law:<br />
―Applicants in England may complete the form with scrupulous care, but still find that there was<br />
something else material to prudent insurers which, apparently, the particular insurer did not<br />
think to ask about but which, nonetheless, the applicant was expected to think of and<br />
disclose.‖ 32<br />
3.24 Evidence of materiality may be put before the court from a number of directions. Expert<br />
witnesses who are engaged in the insurance business and other relevant professionals such as medical<br />
practitioners in respect of life assurance, for example, may be expected to provide assistance to the<br />
court. MacGillivray states that:<br />
Expert evidence on the materiality of undisclosed facts ought to be admitted whenever it is the<br />
usual practice of insurers to be guided by the opinions of that class of experts whose evidence<br />
is offered in the case in question.‖ 33<br />
3.25 However, the question whether a fact is material or not rests upon the courts as the trier of fact.<br />
In Aro Road the Supreme Court overruled Carroll J at first instance when deferring to the opinion of<br />
expert witnesses on materiality, and a healthy degree of caution is often demonstrated by judges in<br />
relation to issues of moral hazard in particular. Roselodge Ltd v Castle 34 and Aro Road itself provide<br />
good examples. The court will require the expert witness to indicate that the fact would be material in the<br />
sense that it would influence the decision to take on the risk, and on what terms, or affect the rate of the<br />
30<br />
31<br />
32<br />
33<br />
34<br />
[1997] 3 All ER 636.<br />
MacGillivary, <strong>Insurance</strong> <strong>Law</strong>, 11 th ed (Sweet & Maxwell 2008), para 17-035.<br />
Observation quoted in the <strong>Law</strong> <strong>Commission</strong>‘s 2007 Consultation Paper at para 2.37.<br />
Para 17-043.<br />
[1966] 2 Lloyds Rep. 113. McNair J rejected evidence on a moral hazard issue from two experts on the basis<br />
of the extreme views these witnesses had expressed during cross-examination.<br />
69
premium. Evidence that the prudent insurer, if notified that the proposer was suffering from a heavy cold<br />
would have led to suspension of a policy was held not material in Harney v Century <strong>Insurance</strong> 35<br />
3.26 The <strong>Commission</strong> has suggested above that in certain circumstances Irish courts have relaxed<br />
the duty in recent years. Even if this is so, the boundaries of the duty of disclosure in Irish law are not<br />
coherently set out by Irish case-law. The <strong>Commission</strong> considers that, insofar as the outcome of a case<br />
may turn on whether a proposal form was or was not used, as set out in Aro Road, the Irish courts have<br />
provided an invaluable starting point, but that a thorough and systematic overhaul of Irish insurance<br />
contract law can best be achieved through legislation. In this context, the <strong>Commission</strong> considers that<br />
these adjustments should recognise that the principle of utmost good faith and the duty of disclosure are<br />
complementary to one another in most cases. The <strong>Commission</strong> thus considers that Irish law should<br />
reflect the approach to the good faith principle set out by McCarthy J in Aro Road and Keating and by<br />
McMahon J in Manor Park Homebuilders.<br />
3.27 The <strong>Commission</strong> provisionally recommends that legislation should continue to provide that,<br />
because the proposer possesses more relevant information than the insurer, the pre-contractual duty of<br />
disclosure should continue to be the basis on which a contract of insurance is a contract of utmost good<br />
faith.<br />
3.28 The <strong>Commission</strong> provisionally recommends that legislation should provide that, in respect of all<br />
contracts of insurance, an insurer shall not be permitted to repudiate liability on the basis of nondisclosure<br />
of material facts of which the insured could not reasonably be expected to have actual<br />
knowledge at the time of applying for cover.<br />
D<br />
Materiality and Inducement<br />
3.29 In Pan Atlantic <strong>Insurance</strong> Co. Ltd v Pine Top <strong>Insurance</strong> Co. Ltd 36 the UK House of Lords<br />
adopted an inducement test that sits alongside the traditional prudent insurer test for materiality. Thus, to<br />
quote from Lord Mustill‘s speech, a judgement which is generally regarded as being the most<br />
authoritative:<br />
―...there is to be implied in the [Marine <strong>Insurance</strong> Act 1906] a qualification that a material<br />
misrepresentation will not entitle the underwriter to avoid the policy unless the<br />
misrepresentation induced the making of the contract, using ‗induced‘ in the sense in which it is<br />
used in the general law of contract.‖ 37<br />
3.30 The Marine <strong>Insurance</strong> Act 1906 does not contain any inducement test and, prior to Pan Atlantic<br />
there was no clear view in England on the issue of inducement. Indeed, even experienced insurance<br />
judges in England had no clear settled view on this point, Sir Michael Kerr in particular having famously<br />
changed his mind on this question. 38 The English law on inducement has been recently summarised by<br />
Clarke LJ as follows: 39<br />
35<br />
36<br />
37<br />
38<br />
39<br />
Harney v Century <strong>Insurance</strong> Co [1983] IEHC 16, applying Mutual Life <strong>Insurance</strong> Co of New York v Ontario<br />
Metal Products [1925] AC 344. Mutual Life itself was a central prop in Lord Lloyd‘s argument in Pan Atlantic<br />
<strong>Insurance</strong> Co. Ltd v Pine Top <strong>Insurance</strong> Co. Ltd [1994] 3 All ER 581 at 632 that the ―decisive influence‖ test<br />
represented English law.<br />
[1994] 3 All ER 581.<br />
Ibid, at p 617; see also St Paul Fire and Marine <strong>Insurance</strong> Co (UK) v McConnell Dowell Constructors Ltd<br />
[1996] 1 All ER 96 and Drake <strong>Insurance</strong> plc v Provident <strong>Insurance</strong> plc [2004] QB 601.<br />
Berger v Pollock [1973] 2 Lloyds Rep 442 at 463, repudiated in Container Transport International Inc v<br />
Provident <strong>Insurance</strong> plc [1984] Lloyd‘s Rep. 476. In Pan Atlantic Lord Mustill observed that Kerr J‘s instinct in<br />
Berger v Pollock “was right”.<br />
Assicurazioni Generali Spa v Arab <strong>Insurance</strong> Group [2003] 1 WLR 577 followed in Laker Vent Engineering v<br />
Templeton <strong>Insurance</strong> Ltd [2009] 2 All ER (Comm) 755.<br />
70
―(i) In order to be entitled to avoid a contract of insurance or reinsurance, an insurer or<br />
reinsurer must prove on the balance of probabilities that he was induced to enter into the<br />
contract by a material non-disclosure or by a material misrepresentation.<br />
(ii) There is no presumption of law that an insurer or reinsurer is induced to enter in the<br />
contract by a material non-disclosure or misrepresentation.<br />
(iii) The facts may, however, be such that it is to be inferred that the particular insurer or<br />
reinsurer was so induced even in the absence of evidence from him.<br />
(iv) In order to prove inducement the insurer or reinsurer must show that the non-disclosure or<br />
misrepresentation was an effective cause of his entering into the contract on the terms on<br />
which he did. He must therefore show at least that, but for the relevant non-disclosure or<br />
misrepresentation, he would not have entered into the contract on those terms. On the other<br />
hand, he does not have to show that it was the sole effective cause of his doing so.‖<br />
3.31 There is no clear authority on the issue of inducement in modern Irish law although some dicta<br />
in Anderson v Fitzgerald may appear to support the proposition. Such opinion as there is appears<br />
against an inducement test. Keane J in Chariot Inns, at first instance, favoured the Australian decision in<br />
Mayne Nickless Ltd v Pegler 40 while Kenny J in the Supreme Court also favoured Mayne Nickless,<br />
observing that the law did not require an insurer to establish<br />
―that the matter not disclosed did affect (and not merely might have affected) their<br />
judgement.‖ 41<br />
3.32 Insofar as Chariot Inns suggests that inducement is not part of Irish law, the <strong>Commission</strong> would<br />
favour the adoption of a provision requiring an insurer to show that non-disclosure of a material fact<br />
played a part in the insurer‘s decision to enter the contract.<br />
3.33 The <strong>Commission</strong> provisionally recommends that an insurer should be required to show that<br />
non-disclosure of a material fact played a part in the insurer‟s decision to enter the contract.<br />
(1) Materiality: decisive influence or “what the insurer would like to know”<br />
3.34 In the context of the duty of disclosure, where a broker or a team of brokers have been<br />
engaged in assisting in the underwriting process, both Chariot Inns and the majority of the judges in Pine<br />
Top v Pan Atlantic have favoured a disclosure test that is often criticised as being too favourable to the<br />
insurer, unduly uncertain in its scope and impractical in terms of application. To state that a material fact<br />
is one that a prudent insurer ―would want to know about‖, even if the fact would not ultimately affect the<br />
underwriting decision, was, in the view of the majority of the <strong>Law</strong> Lords, the result of section 18(2) of the<br />
1906 Act. This conclusion was heavily criticised by the two dissenting judges: Lord Templeman said that,<br />
in his opinion, ―the judgment of a prudent insurer cannot be said to be influenced by a circumstance<br />
which, if disclosed, would not have affected acceptance of the risk or the amount of the premium.‖ 42 Lord<br />
Templeman went on to comment that if materiality was to be determined by reference to what a broker<br />
would have ―wanted to know‖ or ―would have taken into account,‖ even if it would not have affected any<br />
decision to take the risk or fix the premium, the law would ―give carte blanche to the avoidance of<br />
40<br />
41<br />
42<br />
[1974] 1 NSWLR 228.<br />
[1981] IR 199, at p 231.<br />
[1994] 3 All ER 581 at 585. Lord Lloyd at p.638 summarised what he thought the law should be thus:<br />
―whenever an insurer seeks to avoid a contract of insurance or re-insurance on the ground of<br />
misrepresentation or non-disclosure, there will be two separate but closely related questions. (1) Did the<br />
misrepresentation or non-disclosure induce the actual insurer to enter into the contract on those terms? (2)<br />
Would the prudent insurer have entered into the contract on the same terms if he had known of the<br />
misrepresentation or non-disclosure immediately before the contract was concluded? If both questions are<br />
answered in favour of the insurer, he will be entitled to avoid the contract, but not otherwise. The evidence of<br />
the insurer himself will normally be requied to satisfy the court on the first question. The evidence of an<br />
independent broker or underwriter will normally be required to satisfy the court on the second question. This<br />
produces a uniform and workable solution, which has the further advantage, as I see it, of according with good<br />
commercial common sense.‖<br />
71
insurance contracts on vague grounds of non-disclosure supported by vague evidence even though<br />
disclosure would not have made any difference.‖<br />
―If an expert says, ‗If I had known I would not have accepted the risk or I would have<br />
demanded a higher premium‟, his evidence can be evaluated against other insurances<br />
accepted by him and against other insurances accepted by other insurers. But if the expert<br />
says, „I would have wanted to know but the knowledge would not have made any difference‟<br />
then there are no objective or rational grounds upon which this statement of belief can be<br />
tested.‖<br />
3.35 The central criticism of ―the wish to know‖ test is that it is difficult to challenge on rational and<br />
objective grounds: as the law seeks to make the test one which is independent of the actual views or<br />
conduct of the insurer, a ―wish to know‖ test seems to inject an unpredictable element into the law. The<br />
other dissenting judge, Lord Lloyd, commented that the purpose behind the prudent insurer test was<br />
―to establish an objective test of materiality, not dependent on the actual insurer‘s own<br />
subjective views. The test should therefore be clear and simple. A test which depends on<br />
what a prudent insurer would have done satisfies this requirement. But a test which depends,<br />
not on what a prudent insurer would have done, but on what he would have wanted to know, or<br />
taken into account, in deciding what to do, involves an unnecessary step. It introduces a<br />
complication which is not only undesirable in itself but is also, in the case of inadvertent nondisclosure,<br />
capable of producing great injustice.‖ 43<br />
3.36 In response to this controversy the <strong>Law</strong> <strong>Commission</strong> recommended a two stage test of<br />
materiality that one critic has lambasted as an ―untested and unserviceable model‖ 44 that tends to ignore<br />
the context in which Pine Top was decided, that is, a large commercial insurance dispute in which the role<br />
(and possible downstream liability) of experienced brokers was a central concern. These circumstances<br />
should not, in our view, deflect our attention from trying to establish a test of disclosure that takes account<br />
of the commercial context – kind of insurance, method of sale or negotiation, role of an intermediary, etc –<br />
and yet has a degree of ease of application.<br />
3.37 The <strong>Commission</strong> invites submissions as to which of the following two definitions of “material<br />
facts” should be provided for in legislation: either (a) facts which, in the circumstances, a reasonable<br />
insured would know to be highly relevant and should be disclosed; or (b) facts which, in the<br />
circumstances, a reasonable insured would know to have a decisive influence on the insurer‟s decision in<br />
accepting the risk or in setting the level of the premium (the price).<br />
(2) Examples of the Duty of Disclosure in Operation<br />
3.38 The duty of disclosure requires the proposer to reveal any matters that would influence the rate<br />
of the premium which the underwriter might require the proposer to pay, even if that matter would not<br />
strike the proposer as having that effect: Dalgish v Jarvie 45 is often cited as an early authority for this<br />
proposition, but Hasson 46 makes the point that this case has nothing to do with insurance and that until<br />
Jessel M.R. laid out a broad duty of disclosure in London Assurance v Mansel 47 the weight of opinion was<br />
in favour of a fairly narrow duty of disclosure insofar as the duty did not extend to matters that the insurer<br />
could discover by an act of fair inquiry and the exercise of due diligence. London Assurance v Mansel<br />
concerned a life assurance policy in respect of which the proposer had failed to disclose the fact that an<br />
earlier proposal had been declined by another company. Believing that his proposal had been turned<br />
down for reasons other than considerations of health, the proposer felt that the matter was not material.<br />
This was held not to be a justifiable basis for non-disclosure. There is a significant difference between<br />
43<br />
44<br />
45<br />
46<br />
47<br />
[1994] 3 All ER 581 at 625.<br />
Wier, ―Materiality: The Search for Practicality‖, in Soyer, <strong>Reform</strong>ing Marine and Commercial <strong>Law</strong> (Informa <strong>Law</strong><br />
2008)<br />
(1850) 2 M&G 231.<br />
Hasson, ―Uberrima Fides in <strong>Insurance</strong> <strong>Law</strong>‖ (1932) 32 MLR 613 at 620.<br />
(1879) 11 Ch 363.<br />
72
withholding information on the basis of a belief that the matter is not material from instances where a<br />
private individual fails to disclose what he or she does not know. In Economides v Commercial Union 48<br />
the Court of Appeal regarded ‗Nelsonian blindness‘ - ―failing to disclose what he would have seen if only<br />
he had opened his eyes‖ as an example of actual knowledge and not constructive knowledge. 49<br />
3.39 It should be noted that the factual issue of what is a material circumstance is a matter of fact<br />
and that the onus rests upon the insurer: Joel v <strong>Law</strong> Union <strong>Insurance</strong> Co 50 and Kreglinger and Fernau<br />
Ltd v Irish National <strong>Insurance</strong> Co Ltd.. 51 In commercial risk insurance the old view that an underwriter is<br />
under an obligation to inform himself about the practice of the trade in which he insures, regardless of the<br />
generality of the practice in question suggests a narrow perspective on business to business insurance of<br />
this kind, and some recent English case-law suggests that a restrictive view of what factors may be<br />
regarded as material is taking root. In Meisels v Norwich Union <strong>Insurance</strong> Ltd 52 failure to disclose a<br />
proposer‘s various difficulties with the Inland Revenue did not invalidate a property insurance policy.<br />
Tugendhat J held that allegations of criminality were not necessarily material. A test of proportionality<br />
was held to be applicable. Having regard to the nature of the risk and the moral hazard some matters<br />
might be too remote in time or too trivial to require disclosure, whether or not the insured could put<br />
forward some persuasive explanatory material, (ie disprove the allegations made against the proposer).<br />
However, a distinction is to be drawn between unproved allegations of dishonesty and cases where a<br />
claimant has acted dishonestly, (eg preparing false invoices for a commercial prupose even if the purpose<br />
has no link with the loss or the claim: Sharon‟s Bakery (Europe) Ltd v Axa <strong>Insurance</strong> UK plc. 53 Such facts<br />
are material and must be disclosed.<br />
3.40 In general terms the predominant view of materiality has tended to provide insurers with a<br />
convenient means of avoiding policies. Even if a reasonable proposer would not see any connection<br />
between the risk and the facts not disclosed, older English cases posit sweeping duties of disclosure in<br />
many situations. In Locker & Woolf Ltd v Western Australian <strong>Insurance</strong> Co 54 failure to disclose the fact<br />
that the proposer had been refused motor insurance allowed the company to avoid a policy of fire<br />
insurance. In Schoolman v Hall 55 the insured responded to a claim on a domestic contents policy arising<br />
out of a burglary by invoking the proposer‘s failure to disclose a criminal record, the most recent<br />
conviction being some 15 years prior to taking out the policy. In this case (like Regina Fur Co v Bossom 56<br />
where the non-disclosure related to a receiving stolen goods conviction some 20 years previously, a claim<br />
being brought for theft on an ―all risks‖ policy) material non-disclosure was made out. The duty of<br />
disclosure also attaches to criminal convictions recorded against family members, notwithstanding that a<br />
considerable period of time has elapsed since the conviction and the fact that embarrassing matters such<br />
as a criminal past are likely to be shunted into a remote part of a person‘s consciousness: Lambert v<br />
Cooperative <strong>Insurance</strong> Co 57 . In the area of life insurance, failure to disclose that the life assured was<br />
exhibiting symptoms of consumption some four years previously, 58 or had habits or addictions that could<br />
48<br />
49<br />
50<br />
51<br />
52<br />
53<br />
54<br />
55<br />
56<br />
57<br />
58<br />
[1997] 3 All ER 636.<br />
Ibid at p 653 per Peter Gibson LJ and p 648 per Simon Brown LJ.<br />
[1908] 2 KB 863.<br />
[1956] IR 116.<br />
[2007] 1 All ER 1138.<br />
[2011] EWHC 210 (Comm), following Gate v Sun Alliance <strong>Insurance</strong> Ltd [1995] LRLR 385 and <strong>Insurance</strong><br />
Corporation of the Channel Islands v The Royal Hotel Ltd [1998] Lloyd‘s Rep IR 151. See Ryan [1997] CLP<br />
78; Davey [2006] LMCLQ 517.<br />
[1936] 1 K B 408.<br />
[1951] 1 Lloyd‘s Rep 139: Quinby Enterprises v General Accident [1995] 1 NZR 736.<br />
[1958] 2 Lloyd‘s Rep 425.<br />
[1975] 1 Lloyd‘s Rep 169.<br />
Geach v Ingall (1845) 14 M & W 95; Morrison v Muspratt (1827) 4 Bing 60.<br />
73
e prejudicial to the life of the assured 59 is a material non-disclosure, 60 even in the absence of specific<br />
questions being presented.<br />
E<br />
What the Proposer does not have to disclose<br />
3.41 The <strong>Commission</strong> believe that many examinations of the duty of disclosure is flawed insofar as<br />
there can be an undue emphasis placed upon the nature of the duty and materiality – that is, attention is<br />
drawn to the nature of the information – rather than the context in which negotiation has taken place. The<br />
correct approach to the duty of disclosure must marry the duty with the exceptions thereto in order to<br />
accurately state what must be disclosed. 61 While Carter v Boehm 62 is correctly regarded as creating a<br />
duty of utmost good faith that requires full disclosure of material facts, it should be noted that, in the<br />
result, the insurer was held not to be entitled to avoid the policy. In a recent article in which Carter v<br />
Boehm was given a rigorous re-examination Watterson concludes that the exceptions created by Lord<br />
Mansfield suggest that the duty of disclosure is much more limited than is generally thought and that<br />
Carter v Boehm is not a pro-insurer case. 63 The exceptions that Carter v Boehm provided to the duty of<br />
utmost good faith have been put onto a statutory footing in the form of section 18(3) of the Marine<br />
<strong>Insurance</strong> Act 1906.<br />
3.42 These exceptions have been used very liberally by Irish judges and they afford a variety of<br />
counterweights to the duty of disclosure. An insurer who fails to inspect a property for example, or who<br />
fails to ask questions relating to a risk will be in danger of being held to have waived the need for<br />
disclosure. A specialist in a particular industry who has been put on notice of the existence of facts which<br />
he or she, as a prudent insurer should investigate, may be fixed with the knowledge that such an<br />
underwriter will be deemed to possess.<br />
(1) Knowledge<br />
3.43 Knowledge of any circumstance which is known or presumed to be known to the insurer. The<br />
insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in<br />
the ordinary course of his business, as such, ought to know. 64<br />
3.44 MacGillivary treats this exception to the duty of disclosure as being divided into two distinct<br />
classes. Firstly, there is ―no duty to disclose matters of common knowledge and public awareness of<br />
which any reasonably well informed person is presumed to be aware‖. 65 In Leen v Hall 66 Ballyheigue<br />
Castle County Kerry was insured against damage by riot, civil commotion, war, rebellion and fire. It was<br />
destroyed by the IRA in 1921, the proposer failing to disclose that the Crown had used the dungeon to<br />
house Sinn Fein prisoners previously. The jury apparently concluded that civil commotion was public<br />
knowledge in the County at that time. As in many instances of insurance contract law, the test is easier to<br />
state than to apply and the individual facts or each case are critical. The leading case is Bates v Hewitt 67<br />
A confederacy cruiser, The Georgia was dismantled and sold to the plaintiff who obtained insurance from<br />
the defendant underwriter in 1864. In 1863 and early 1864 The Georgia had attracted considerable<br />
59<br />
60<br />
61<br />
62<br />
63<br />
64<br />
65<br />
66<br />
67<br />
Joel v <strong>Law</strong> Union <strong>Insurance</strong> Co [1908] 2 KB 863.<br />
Most cases are in fact misrepresentation cases, that is, a question was asked but answered incorrectly.<br />
This is reflected in the IIF Non-Life Code of Practice which states that an insurer will not repudiate liability ―on<br />
grounds of non-disclosure of a material fact which a policyholder could not reasonably be expected to have<br />
disclosed.‖<br />
(1766) Burr 1905.<br />
In Mitchell and Mitchell, Landmark Cases in the <strong>Law</strong> of Contract (Hart 2008).<br />
Marine <strong>Insurance</strong> Act 1906, section 18(3)(b).<br />
Inspection by an insurer of the risk or property in question will generally involve acquisition of constructive<br />
knowledge: Pim v Lewis (1862) 2 F & F 778.<br />
(1923) 16 2 ILR 100.<br />
(1867) LR 2QB 595.<br />
74
public interest in running blockades mounted by the Union forces and the vessel had been laid up in<br />
Liverpool for some time. The underwriter admitted that he had been aware of The Georgia‘s earlier<br />
exploits, but at the time of granting the policy he did not associate the confederate vessel with the risk<br />
being proposed. While the insurer had the means of discovering that the confederate cruiser and the ship<br />
being proposed were one and the same, he was under no duty to investigate and the proposer was not<br />
discharged from the duty of disclosure. Mellor J in his speech indicated that if a proposer was to be able<br />
to calculate just how little was needed in order to discharge the duty, this would be to introduce ―a most<br />
dangerous principle into the law of insurance‖, 68 and the judge stressed that the duty to provide a full and<br />
frank disclosure is at the heart of the duty.<br />
3.45 The second sense in which an insurer may not invoke non-disclosure of material fact is where<br />
the fact is one that an insurer is deemed to know. An insurer who is active in a specific trade or industry<br />
will be deemed to know what the characteristics of the sector are - the kind of goods used and activities<br />
that are undertaken respectively. Unusual risks or activities must be disclosed, however, but it is not<br />
necessary for the proposer to do anything more than disclose material facts. The proposer is not required<br />
to disclose any assessments or opinions or conclusions the proposer has made: insofar as the insurer is<br />
able to make these for himself, non-disclosure is not an invalidating factor. In Kreglinger and Fernau Ltd<br />
v Irish National <strong>Insurance</strong> Co Ltd 69 the defendants refused to honour performance bonds taken out in<br />
respect of meat processing contracts on the basis that specific undertakings in contracts had not been<br />
disclosed to them. In regarding this contract as a contract of utmost good faith, Davitt P considered that<br />
no breach of the duty of disclosure had taken place. The President drew a distinction between disclosure<br />
of the existence of a contract, the details of which had not been set out, and non-disclosure of material<br />
facts:<br />
―While the duty to make full disclosure of all matters material to the risk rests upon the insured,<br />
and it does not fall to the insurer to relieve him of that duty, by making inquiries, the converse is<br />
to this extent true, that the insured does not have to conduct the insurer‘s business for him.<br />
Where the contract, the performance of which the insurer is asked to cover, contains a clear<br />
intimation that a matter, which is specifically referred to but not fully set out, is of importance,<br />
and full information is to be had for the asking, it would be quite unreasonable and unjust to<br />
allow the insurer to repudiate liability on the grounds that he did not know and was not told the<br />
details of something which he was in fact told about.‖ 70<br />
3.46 Other illustrations of this exception to the duty of disclosure are provided by some decisions<br />
approved and followed by Davitt P in Kreglinger and Fernau. In The Bedouin 71 the insurer was not told<br />
that he was insuring freight under a time charter. The charter contained a standard cesser clause that in<br />
the view of the Court was practically universal in time charters and the insurer was held to have been<br />
given sufficient information to fix him with notice of the risk. Lord Esher MR remarked that the assured is<br />
neither bound to tell the insurer what the law is; nor is he required to tell him of every fact, but only<br />
material facts.<br />
68<br />
69<br />
70<br />
71<br />
Ibid at 608. Hasson (1969) 32 MLR 615 at 620 is critical of this decision. The ‗dangerous principle‘ referred to<br />
by Mellor J was concerned with preventing a proposer being encouraged to calculate how little need be<br />
disclosed in order to fix the insurer with knowledge.<br />
[1956] IR 116. Manor Park Homebuilders Ltd v AIG Europe (Ireland) Ltd [2009] 1 ILRM 190. The Canadian<br />
courts are moving towards a due diligence standard for insurers on the basis that ―technology has reduced the<br />
one-sidedness of the obligation of good faith with the growth and availability of information accessible to<br />
particular industries and the public generally.‖ Per Howden JA in De koning v Vector <strong>Insurance</strong> Network<br />
(Ontario) Ltd [2009] Can LII 43644 (Ont) discussing Coronation Ins Co v Taku Air Transport Ltd [1991] 3 SCR<br />
622. These cases cover transportation policies against statutory rules on disclosure of facts to regulatory<br />
bodies by insureds.<br />
[1956] IR 116 at 154.<br />
[1894] P.1.<br />
75
(2) Factors reducing the risk<br />
3.47 ―Any circumstance which diminishes the risk‖. The Marine <strong>Insurance</strong> Act 1906, section<br />
18(3)(a) provides that factors that make a loss less likely to occur need not be disclosed.<br />
In Carter v Boehm Lord Mansfield said that<br />
―the underwriter needs not to be told what lessens the risque agreed and understood to be run<br />
by the express terms of the policy…if he insures a voyage, with liberty of deviation, he need<br />
not be told what tends to show there will be no deviation.‖ 72<br />
In Manor Park Homebuilders Ltd. v AIG Europe (Ireland) Ltd 73 an unoccupied building was the subject of<br />
a proposal for fire insurance cover. The proposal failed to disclose that steel shutters to the lower floor<br />
had been removed and the windows and doors were bricked up with concrete blocks. McMahon J. held<br />
that this was not a material non-disclosure on the basis that this measure rendered the building more,<br />
rather than less, secure. MacGillivray remarks that this exception<br />
―may seem obvious, but such a fact does literally fall within the definition of a material fact,<br />
since it would influence the underwriter in deciding whether to take the risk or not, or in fixing<br />
the premium.‖ 74<br />
(3) Factors covered by any warranty<br />
3.48 Any circumstance which it is superfluous to disclose by reason of any express or implied<br />
warranty. If a material circumstance is not disclosed, but the facts not disclosed are the subject of an<br />
express or implied warranty, or an exclusion clause, non-disclosure will not provide a basis for repudiating<br />
the contract because the insurer will be entitled to rely upon the contractual promise or limitation in<br />
question: Ross v Bradshaw. 75<br />
(4) Waiver<br />
3.49 ―Any circumstance as to which information is waived by the insurer‖: see the Marine <strong>Insurance</strong><br />
Act 1906 section 18 (3)(c). This is perhaps the most difficult and unpredictable exception to apply in<br />
practice.<br />
3.50 There are several Irish cases in which waiver plays a part in explaining why the contract of<br />
insurance remained enforceable, often in conjunction with other factors. For a waiver to be made out<br />
however it will be necessary for the insurer to conduct his business in such a way as to intimate that<br />
certain facts are not required to be disclosed. The proposer may have disclosed sufficient facts that will<br />
require insurers to investigate those surrounding details or circumstances to the prudent insurer standard.<br />
3.51 In the first situation an insurer may specifically state that no duty to disclose is required - over<br />
the telephone motor policies are increasingly concluded on this basis. In Aro Road and Land Vehicles v<br />
<strong>Insurance</strong> Corporation of Ireland 76 the minority judgement of Henchy J indicated that where travel or<br />
transport insurance was concluded ‗over the counter‘ between an agent of the insurer, the proposer being<br />
given no opportunity to furnish all material information, the conduct of the insurer will preclude full<br />
disclosure. The broader view of the majority was that in cases of over-the-counter insurance, absent<br />
fraud, the proposer needs only to answer the questions asked. McCarthy J said that:<br />
―if the insurer were to have the opportunity of denying or loading the insurance one purpose of<br />
the transaction would be defeated. Expedition is the hallmark of this form of insurance.‖ 77<br />
72<br />
73<br />
74<br />
75<br />
76<br />
77<br />
(1766) Burr 1905 at 1909.<br />
[2009] 1 ILRM 190.<br />
Para 17-081.<br />
(1761) 1. Wm. Bl. 312.<br />
[1986] IR 403.<br />
Ibid at 415.<br />
76
In Manor Park, McMahon J. took a similar approach, indicating that because the insurer issued the policy<br />
for its own reasons (to maintain a good relationship with the proposer‘s broker) while failing to issue<br />
appropriate documentation and carry out inspections of the property, the insurer was in breach of it‘s duty<br />
―of uberrimae fidei in failing to adequately inform itself of the facts and in failing, for improper<br />
reasons, to deal fairly with the insured or consider his interests.‖ 78<br />
3.52 In cases where a proposal form is used, even McCarthy J in Aro Road conceded that the<br />
Chariot Inns approach to the duty of disclosure may still hold sway. The failure to ask a question directed<br />
at a particular subject or risk does not amount to a waiver (Roselodge Ltd v Castle 79 ) but it is possible that<br />
questions posed on the proposal form may imply a waiver of the insurer‘s right to obtain information on<br />
related matters. It all depends on the questions and context, and some questions may, in particular<br />
instances, serve to broaden the duty by reminding the proposer of the common law duty. However, in<br />
general, the effect of questions asked will be to limit the duty of disclosure.<br />
―if questions asked on particular subjects and the answers to them are warranted, it may be<br />
inferred that the insurer has waived his right to information, either on the same matters but<br />
outside the scope of the questions, or on matters kindred to the subject-matter of the<br />
questions. Thus, if an insurer asks, ‗How many accidents have you had in the last three<br />
years?‘ it may well by implied that he does not want to know of accidents before that time,<br />
though these would still be material. If an insurer asks whether individual proposers have ever<br />
been declared bankrupt, he waives disclosure of the insolvency of companies of which they<br />
have been directors. Whether or not such a waiver is present depends on a true construction<br />
of the proposal form, the test being, would a reasonable man reading the proposal form be<br />
justified in thinking that the insurer had restricted his right to receive all material information,<br />
and consented to the omission of the particular information in issue?‖ 80<br />
3.53 The wording of any declaration on the proposal form may be important. Kelleher v Irish Life<br />
<strong>Insurance</strong> Co Ltd 81 demonstrates that a declaration in a proposal form, and the context in which a policy<br />
is offered – in that case as a special promotional deal to a large group of potential customers – can lead<br />
to a conclusion that all the insurer is concerned about will be a possibility that the proposer made a<br />
misrepresentation. The decision of the Financial Services Ombudsman, in Case 20 of his December<br />
2007 Summary of Complaints, illustrates that the wording of the declaration may be important. Here, a<br />
Group Policy covering employees was held to require the policyholder to disclose the fact that a senior<br />
employee was seriously ill. The Financial Services Ombudsman held that the questions asked had not<br />
limited the duty of disclosure, distinguishing Aro Road and Kelleher on the facts.<br />
3.54 In cases where the proposal form is not completed, some questions being ignored or the space<br />
for insertion of an answer being left blank, it may be that the inference to be drawn is that a negative<br />
answer was intended. In Roberts v Avon <strong>Insurance</strong> Co. 82 a question asking about previous losses was<br />
not answered; the policy was avoided for fraudulent concealment on the basis that the proposer had<br />
effectively answered that there were no previous losses. However, in general terms, if on the face of the<br />
proposal form a question is not completed or an answer given is obviously incomplete, an insurer who<br />
issues a policy without seeking additional information might be held to waive the requirement of full<br />
disclosure, thus having to rely on some other basis for avoiding the policy such as fraudulent<br />
concealment or misrepresentation. If, following discovery of the proposer‘s failure to disclose all material<br />
facts the insurer elects to continue with the contract, the insurer will be held to have affirmed the contract.<br />
78<br />
79<br />
80<br />
81<br />
82<br />
[2009] 1 ILRM 190 at 216.<br />
[1966] 2 LI LR 113.<br />
MacGillivray, para 17-019 (footnotes omitted). See on vague questions and specific questions: Bruwer v Nova<br />
Risk Partners Ltd 2011(1) SA 234. On SA <strong>Law</strong> generally see Van Niekerk, ―Goodbye to the Duty of<br />
Disclosure‖ (2005) 17 SA Merc LJ. 150, 323.<br />
[1993] ILRM 643. This view is not confined to health insurance: see FBD <strong>Insurance</strong> plc v Financial Services<br />
Ombudsman [2011] IEHC 315 (motor insurance).<br />
[1956] 2 Lloyd‘s Rep 240.<br />
77
This will normally require the insurer to unequivocally communicate to the insured an intention to affirm<br />
the contract: Peyman v Lanjani. 83 Receipt of a premium, even in a case of fraudulent concealment of a<br />
material fact was held to be an act of affirmation in Armstrong v Turquand. 84<br />
(5) The IIF Life Assurance Code of Practice and Ombudsman Adjudications on Non<br />
disclosure<br />
3.55 The Irish <strong>Insurance</strong> Federation Code of Practice on Life Assurance: Duty of Disclosure<br />
contains a number of important provisions which are intended to direct IIF Members on how the member<br />
is to respond to incidents of non disclosure, misrepresentation and breach of warranty. The Code<br />
addresses precontractual issues and avoidance under three headings, Proposal forms, Policies and<br />
accompanying documents, and Claims.<br />
3.56 Under the code itself, which is confined to policies of life assurance effected in a private<br />
capacity by individuals resident in the Republic of Ireland, a number of provisions are couched in neutral<br />
language. Requirements or obligations under this code are not mandatory: words like ―should‖ and<br />
―may‖ appear to condition the binding nature of the Code particularly in relation to the provisions or<br />
proposal forms and policies accompanying documents. Nevertheless, the Life Assurance Code provides<br />
―best practice‖ benchmarks that could usefully form the basis for future legislation.<br />
3.57 In relation to proposal forms the Life Assurance Code states:<br />
If the proposal form calls for the disclosure of material facts a statement should be included in<br />
the declaration, or prominently displayed elsewhere on the form or in the document of which it<br />
forms part: -<br />
(i) drawing attention to the consequences of failure to disclose all material facts that an insurer<br />
would regard as likely to influence the assessment and acceptance of a proposal;<br />
(ii) warning that if the signatory is in any doubt about whether certain facts are material, these<br />
facts should be disclosed.<br />
3.58 On issues of substance, the Life Assurance Code of Practice seems to suggest that the onus<br />
rests upon insurers to elicit information about material facts from proposers by way of specific questions<br />
in proposal forms, a proposition that is at variance with the traditional view concerning the duty of<br />
disclosure:<br />
In relation to those issues upon which insurers wish to base their underwriting decisions, clear<br />
questions should be included in proposal forms on those matters which have been commonly<br />
found to be material.<br />
3.59 The code also goes on to state that insurers ―will continue to develop clearer and more explicit<br />
proposal forms‖.<br />
3.60 The Life Assurance Code of Practice also contains a very significant limitation on the asking of<br />
questions concerning matters that could be viewed as being within the constructive knowledge of the<br />
proposer. The Code states:<br />
Insurers should avoid asking questions which would require knowledge beyond that which the<br />
signatory could reasonably be expected to possess.<br />
3.61 These provisions are broadly replicated in the IIF Code of Practice on Life Assurance Selling<br />
and in the IIF Code of Practice – Non Life <strong>Insurance</strong>. While these codes do not appear to be in<br />
widespread circulation any longer, it is arguable that even these limited and legally unenforceable<br />
statements of good practice reflect an awareness on the part of the <strong>Insurance</strong> Industry that the duty of<br />
utmost good faith requires proposer and insurer to engage in a dialogue and an exchange of information<br />
83<br />
84<br />
[1985] Ch 157.<br />
(1858) 9 ICLR 32. On affirmation generally see <strong>Insurance</strong> Corporation of the Channel Islands v Royal Hotel<br />
Ltd [1998] Lloyd‘s Rep. IR 151, applied in Persimmon Homes Ltd v Great Lakes Reinsurance (UK) plc [2011]<br />
Lloyd‘s Rep. IR 101, see also Argo Systems FZE v Liberty <strong>Insurance</strong> PTE Ltd [2011] EWHC 301 (Comm).<br />
78
at the precontractual stage. The decisions of the <strong>Insurance</strong> Ombudsman, under the <strong>Insurance</strong><br />
Ombudsman of Ireland Scheme reflect this.<br />
In a life assurance case where the person to be insured had a serious cardiac condition the<br />
agent of the insurer failed to investigate the circumstances or explain the duty of disclosure to the<br />
proposer. There was clearly non disclosure of material facts but there was an award of 50% of<br />
the sum assured, the non disclosure being mitigated by the agent‘s failings. 85<br />
In one case of non disclosure of a previous claims history in relation to household insurance, an<br />
accidental non disclosure was condoned and the claim met in the usual way. 86<br />
Due to an ambiguity in one of the questions on the proposal form, a response was held to be a<br />
misrepresentation, not non disclosure. The Ombudsman applied a proportionality remedy for the<br />
insurer, allowing the insured to recover 70% on a household policy claim. 87<br />
3.62 The decisions of the <strong>Insurance</strong> Ombudsman in the 1999 to 2004 period continued to<br />
demonstrate a similar approach to non disclosure issues with cases going either way. 88 For example<br />
An assured died of cancer 12 months after a life policy came into force. This policy was an<br />
upgrade on three other policies that went back for a period of six years. At the time when the<br />
first policy was taken out, there was non disclosure of the fact that the proposer was on<br />
medication for high blood pressure. That condition had no link with the cause of death but it was<br />
probably material.<br />
3.63 The <strong>Insurance</strong> Ombudsman observed that this kind of situation:<br />
―where the death is due to a condition unrelated to the cause of death, assurers occasionally<br />
take the view that a reasonable approach is to pay the sum assured on an ex-gratia basis, or if<br />
a significant extra premium has been lost because of the non-disclosure of the pre-existing<br />
condition to make some downward adjustment to their payment.‖<br />
3.64 The <strong>Insurance</strong> Ombudsman held that the refusal to pay on the claim was in all the<br />
circumstances of the case ―too harsh‖ and she upheld the complaint. 89<br />
A proposal form for life cover asked, ―if you have given up drinking alcohol, please state how<br />
long since stopping, reason for discontinuing and previous consumption‖. The reply, ―3 years<br />
due to ulcer‖ was incomplete. Further inquiries would have revealed a history of abuse involving<br />
hospitalisation. Death was the result of lung cancer, caused by smoking, a habit which was<br />
disclosed on the proposal form. The <strong>Insurance</strong> Ombudsman noted that:<br />
―the Company went on to admit that there was a degree of disclosure, which should have<br />
prompted it to make some further enquiries. In view of the fact that recognising what<br />
constitutes a ―material fact‖ may be obvious to an underwriter but not necessarily to a member<br />
of the general public, the Company reviewed its position and agreed to admit the claim in<br />
amount £30,000.‖ 90<br />
In one case of non disclosure on an industrial life policy, where medical reports were available,<br />
the insured did not exercise the option to send the proposer for a medical examination. Because<br />
both parties ―were remiss‖ an ex gratia award was recommended. 91<br />
85<br />
86<br />
87<br />
88<br />
89<br />
90<br />
91<br />
Case Study 50 of the Digest.<br />
Case Study 76 of the Digest. Contrast Case Study 4 in Annual Report 2010, p.60.<br />
Case Study 159 of the Digest.<br />
For instances finding for the insurer see Case Study 15, 2000, Case Study 14, 2003.<br />
Case Study 8, 1999. See also Case Study 10, 1999 where a proportionate settlement of 50% of a claim was<br />
reached.<br />
Case Study 22, 2000.<br />
Case Study 16, 2002.<br />
79
3.65 Although the Financial Services Ombudsman‘s powers and jurisdiction in relation to the<br />
investigation of complaints stand on a statutory footing, there appears to be a significant element of<br />
continuity and uniformity of approach to non-disclosure defences. The following examples show that the<br />
decisions the Financial Services Ombudsman has reached demonstrate both a willingness to uphold the<br />
uberrimae fidei principle and recognise that the principle has implications for proposer and insured.<br />
A life assurance death benefit policy was avoided by the insurer when the proposer completed a<br />
Declaration of Health Form which asked a number of relevant questions in relation to the<br />
proposer‘s health and contained a warning that a failure to detail all material facts ―may invalidate<br />
a future claim‖. The insurer referred specifically to the fact that the proposer had not disclosed a<br />
consultation with his GP in relation to a serious health problem just two weeks prior to completion<br />
of the Form. The Ombudsman found that the Company was entitled to repudiate the claim,<br />
stating that:<br />
―the principal characteristic of an insurance contract is that it is a contract of utmost good faith:<br />
both the insurance company and the person looking for insurance must exercise utmost good<br />
faith in their dealings with each other. If the person looking for insurance fails to disclose<br />
circumstances which would influence the decision of the insurance company in fixing the<br />
premium or in determining whether or not to accept the risk, the insurance company may be<br />
entitled to decline liability under the policy‖. 92<br />
In a guesthouse theft insurance case, the proposer had been asked specific questions relating to<br />
any previous losses and the consequences of non disclosure had been set out in the Proposal<br />
Form. Two questions were incompletely answered. While the facts appear to set out instances<br />
of misrepresentation, the Ombudsman referred to the uberrimae fidei principle and the duty of<br />
disclosure, holding that the insurer was entitled on these facts to avoid the policy from its<br />
inception. 93<br />
In an important ruling on the duty of disclosure in relation to the ill health of an employee to be<br />
covered under a Group Policy, the Ombudsman upheld the duty to make full disclosure of all<br />
relevant information, rejecting an argument that the medical condition of this high profile<br />
executive was a matter of common knowledge. 94<br />
A failure to disclose a medical condition that had arisen out of a road accident that had occurred<br />
after the proposal form was completed but before the cover was commenced gave rise to a right<br />
to avoid the policy. The Ombudsman stressed that the duty to advise of changed circumstances<br />
prior to commencement of cover had been set out on the Proposal Form. 95<br />
3.66 There are however a number of situations in which the non disclosure of material facts has not<br />
been dispositive before the Financial Services Ombudsman. For example, the Ombudsman has been<br />
prepared to hold that the non disclosure relied upon was based on illegal or improper inferences drawn by<br />
the insurer, or that, despite non disclosure, other mitigating circumstances were present.<br />
As a general principle, a decision by an insurance company to decline to meet a claim on the<br />
basis that he insured has committed an unlawful act may, in the absence of a finding by a court<br />
of law, be an improper inference, the Ombudsman citing articles 34 and 38 of the Constitution. 96<br />
In medical treatment insurance contracts the waiting period or pre-existing condition exclusion<br />
may raise issues of non disclosure by the proposer/the proposer‘s medical adviser. There are<br />
92<br />
93<br />
94<br />
95<br />
96<br />
December 2009, p. 24-5.<br />
July 2009, p. 25-6.<br />
December 2007, p.21-3.<br />
September 2005 – Income Protection Policy – Policy voided for non disclosure not upheld but contributions<br />
refunded.<br />
January 2007. ―Only the courts determine whether an insured person committed or attempted to commit an<br />
unlawful act.‖ See also Case Study 3 in the Annual Report 2010. See also the presumption against crime in<br />
O‟Hagan v Sun Life Assurance Co of Canada [1932] IR 741.<br />
80
decisions in which the Ombudsman has found in favour of the proposer on the basis that the<br />
evidence did not establish the pre-existing condition as a matter of fact. 97<br />
Where the non disclosure can be due to a failure by the insurer‘s representative to follow<br />
standard procedures, the Ombudsman has observed that an award of compensation may be<br />
made because of the way in which the policy was sold. The insurer will be able to avoid the<br />
policy itself for non disclosure. 98<br />
Even if an insurer has justifiable grounds for refusing a claim on the grounds of non disclosure of<br />
a prior condition, an unrelated risk that materialised led the Ombudsman to award 50% payable<br />
on a holiday cancellation policy. 99<br />
(6) Non-Disclosure – the 1957 <strong>Reform</strong> Proposals in England and Wales<br />
3.67 There have been a number of reviews of English insurance contract law. In the first of these<br />
exercises, the <strong>Law</strong> <strong>Reform</strong> Committee was asked by Lord Chancellor Simonds to consider the position in<br />
law, of insurance companies when using special conditions and exceptions in insurance contracts, as well<br />
as the consequences of non-disclosure of material facts by a proposer. The <strong>Law</strong> <strong>Reform</strong> Committee<br />
issued its report, Conditions and Exceptions in <strong>Insurance</strong> Policies 100 in 1957. The Committee said that<br />
the use of special conditions and exceptions in policies was open to potential abuse insofar as an insurer<br />
could invoke a number of technical matters against even an honest and careful proposer in order to avoid<br />
indemnifying the proposer in respect of a claim. While the Committee indicated that there were some<br />
isolated instances of abuse, the Committee took the view that there was no evidence this was widespread<br />
in the industry. The Committee accepted the assurance of the industry that no reputable insurer would<br />
invoke a technical defence to defeat an honest claim. Notwithstanding these assurances, the Committee<br />
was critical of the fact that the law allowed an insurer a broad discretion in forming an assessment of the<br />
honesty of the proposer. Such was the scope of the latitude that express contractual terms could provide<br />
to an insurer, the Committee felt that a limited number of provisions could be enacted which would<br />
provide some counterbalance, whilst not interfering with the principle of freedom of contract.<br />
3.68 The most important recommendation concerned materiality:<br />
―For the purposes of any contract of insurance no fact should be deemed material unless it<br />
would have been considered material by a reasonable insured.‖<br />
3.69 The 1957 <strong>Law</strong> <strong>Reform</strong> Committee Report was produced at a time when English and Scottish<br />
law had no real conception of consumer protection and there was no attempt to distinguish between the<br />
position of a proposer acting within his or her private sphere and proposers acting within a business or<br />
commercial context. English judges at this time were attempting to protect contracting parties from the<br />
effects of draconian or far reaching limitation or exclusion clauses by adopting crude techniques such as<br />
the fundamental breach doctrine, and in the area of sales law Parliament ultimately intervened in the form<br />
of a number of legislative measures that sought to counteract abuse of the principle of freedom of<br />
contract – something the 1957 <strong>Law</strong> <strong>Reform</strong> Committee report felt unable to recommend, as a matter of<br />
principle. The <strong>Law</strong> <strong>Reform</strong> Committee considered that making proposals to counteract unfair contractual<br />
practices went beyond the specific terms of reference that the Committee had been given. Nevertheless,<br />
the materiality provision, referred to in the paragraph above, has retained its attractiveness as a reform<br />
proposal.<br />
(7) The English <strong>Law</strong> <strong>Commission</strong>’s 1979 Working Paper 101<br />
3.70 After setting out the nature and scope of the duty of disclosure in English law. The English<br />
<strong>Law</strong> <strong>Commission</strong> drew attention to a number of criticisms that have been levied against the duty,<br />
97<br />
98<br />
99<br />
100<br />
101<br />
July 2009, p.19-20 and see also p.23-4; see also December 2005, p.6-7.<br />
July 2008, p.13-14.<br />
July 2008, p.16-17.<br />
(1957) Cmnd. 62.<br />
Working Paper No. 73, <strong>Insurance</strong> <strong>Law</strong>: Non Disclosure and Breach of Warranty.<br />
81
particularly the <strong>Law</strong> <strong>Reform</strong> Committee‘s view that the duty may catch honest and careful proposers, and<br />
judicial criticisms voiced in 1975 in Lambert v Co-operative <strong>Insurance</strong> Society Ltd 102 and in earlier cases.<br />
3.71 The provisional conclusion reached by the <strong>Law</strong> <strong>Commission</strong> was that the duty of disclosure<br />
―should be retained across the board‖ but the <strong>Law</strong> <strong>Commission</strong> went on to distinguish between cases<br />
where the insurer did not make use of a proposal form from situations where a proposal form was utilised.<br />
3.72 In cases where no proposal form was used the duty<br />
―should be to disclose those facts which a reasonable man in his circumstances would<br />
consider to be material in the sense that they would influence the judgment of a prudent insurer<br />
in accepting the risk or fixing the premium. The insured should however only be under a duty<br />
to disclose facts which he either knows or which a reasonable man in his circumstances ought<br />
to know.‖ 103<br />
3.73 The <strong>Law</strong> <strong>Commission</strong> explained that the formulation of the test, in particular the reference to ―a<br />
reasonable man in his circumstances,‖ sought to direct attention to the circumstances of the particular<br />
insured rather than imposing a wholly objective standard of ―a reasonable insured‖. The standard might<br />
depend on ―whether the insured was a businessman or consumer‖, but no recommendations on the<br />
precise range of relevant circumstances were made. Benefits of such a test were said to include<br />
dispensing with the need for expert evidence as to what would influence a prudent insurer. In opting for a<br />
constructive knowledge factor, such knowledge could be attributed to the reasonable man, the <strong>Law</strong><br />
<strong>Commission</strong> sought to clarify the law and bring non marine insurance contract duties into line with the<br />
marine insurance duty, as set out by section 18(1) of the Marine <strong>Insurance</strong> Act 1906.<br />
3.74 In cases where a proposal form was used the <strong>Law</strong> <strong>Commission</strong> suggested a radical approach<br />
that hinged upon the <strong>Commission</strong>‘s dissatisfaction with the existing law:<br />
―Our provisional recommendation is that if a proposal form has been completed by the insured,<br />
insurers should not be permitted to say that a fact outside the scope of the questions asked is<br />
material and ought therefore to have been disclosed. Insurers should be taken to have waived<br />
the duty of disclosure in regard to that fact.‖ 104<br />
3.75 The proposer will be held to have discharged the duty of disclosure and the good faith<br />
obligation by providing complete and accurate answers to the questions asked. However, the proposal<br />
form must itself contain a statement in respect of the duty and the consequences of non compliance.<br />
3.76 The <strong>Law</strong> <strong>Commission</strong> identified two difficulties in relation to the reformulated duty of disclosure<br />
vis-à-vis proposal form-based insurance contacts. The first obstacle to effective reform was the<br />
possibility that a proposer might well know something that would be material: for example, a proposer has<br />
received threats to burn down property from a disgruntled former employee but goes ahead in arranging<br />
fire insurance, the threat being outside the ambit of questions put in the proposal form. For this reason<br />
the English <strong>Law</strong> <strong>Commission</strong> recommended a residual duty ―not deliberately to conceal facts which he<br />
knows to be material and of which he has actual knowledge.‖ 105 The second obstacle to effective reform<br />
was the possibility that the insurer might ask a general question concerning any facts that a prudent<br />
insured should consider relevant. If` this were possible, the reforms would be side-stepped via a contract<br />
clause that would fill the gap left by waiver of the duty of disclosure. For this reason the English <strong>Law</strong><br />
<strong>Commission</strong> recommended that ―an insured should be entitled to ignore any such question and insurers<br />
should be deprived of any remedy in respect of false information supplied in answer to any such<br />
question‖.<br />
102<br />
103<br />
104<br />
105<br />
[1975] 2 Lloyd‘s Rep 485.<br />
See paragraphs 59-64 of Working Paper No. 73.<br />
Paragraph 66.<br />
Paragraph 73.<br />
82
(8) The English <strong>Law</strong> <strong>Commission</strong>’s 1980 Report 106<br />
3.77 When the <strong>Law</strong> <strong>Commission</strong> produced its Report on <strong>Insurance</strong> <strong>Law</strong>: Non-Disclosure and<br />
Breach of Warranty (October 1980) some significant differences between the provisional<br />
recommendations in the Working Paper and the final recommendations became evident. While the<br />
analysis of defects in the existing law relating to non-disclosure remained the same, the consultation<br />
exercise persuaded the <strong>Law</strong> <strong>Commission</strong> to row back from some of the more innovative<br />
recommendations, but on the question whether non consumer insurance should be treated differently in a<br />
formal sense, the <strong>Commission</strong>ers held to their view.<br />
3.78 The <strong>Law</strong> <strong>Commission</strong> rejected the argument that an attenuated duty of disclosure should be<br />
imposed on consumers. Suggestions that the duty should be limited to cases of fraudulent nondisclosure<br />
were rejected on the basis that fraud is difficult to prove and that a limited duty would not assist<br />
insurers in estimating the risk – after all, this is the primary reason why the duty exists. In this context the<br />
<strong>Law</strong> <strong>Commission</strong> returned to its core theme, that, save for MAT insurance, the goal of retaining a unitary<br />
body of legal rules and contractual practices should be pursued:<br />
―it seems to us that any separate regime for consumers and non-consumers would lead to<br />
anomalous results in practice. This can again be illustrated by a shopkeeper who lives above<br />
his shop. He applies for fire and burglary cover in respect of both his shop and his flat at the<br />
same time: the former application would be made in the course of a business, but the latter<br />
would not. It would be odd, to say the least, if the resulting contracts were subject to different<br />
vitiating factors.‖ 107<br />
3.79 The <strong>Law</strong> <strong>Commission</strong> returned to the <strong>Law</strong> <strong>Reform</strong> Committee Report from 1957 and proposed<br />
that, save for marine insurance contracts, the standard set in that Report should be adopted. Thus:<br />
―for the purpose of any contract of insurance no fact should be deemed material unless it would<br />
have been considered material by a reasonable insured.‖ 108<br />
3.80 This rejection of the prudent insurer test replicates the view initially set out in the 1979 Working<br />
Paper. However, the <strong>Law</strong> <strong>Commission</strong> treated the duty of disclosure in a significantly different way when<br />
it came to examine the duty of disclosure per se and the duty of disclosure when a proposal form, of<br />
whatever kind, is in use. In the Working Paper a much more stark contrast was drawn between these two<br />
situations. In the Report the <strong>Law</strong> <strong>Commission</strong> set forward a set of recommendations in insurance<br />
contracts generally, with a significant gloss being added to the general recommendations when a<br />
proposal form was employed by the insurer.<br />
(9) The general duty of disclosure in the 1980 Report<br />
3.81 The <strong>Law</strong> <strong>Commission</strong> recommended that the duty of disclosure should be modified in the<br />
following way:<br />
―A fact should be disclosed to the insurers by the applicant if: -<br />
(i)<br />
it is material to the risk;<br />
(ii) it is either known to the applicant or is one which he can be assumed to know;<br />
(iii) it is one which a reasonable man in the position of the applicant would disclose<br />
to his insurers, having regard to the nature and extent of the insurance cover<br />
which is sought and the circumstances in which it is sought.‖<br />
3.82 In relation to (i) above, the <strong>Law</strong> <strong>Commission</strong> indicated there was no intention to change the<br />
definition of materiality, save in relation to the need to expand the range of potential responses by ―the<br />
prudent insurer‖. Rather than decline the risk or charge a different premium, a prudent insurer could well<br />
106<br />
107<br />
108<br />
Cmnd. 8064.<br />
Ibid, paragraph 4.42.<br />
Cmnd 62, paragraph 14.<br />
83
load an excess or exclude some risks via an exclusion clause. Such responses were recommended as a<br />
relevant consideration in determining materiality.<br />
3.83 In relation to (ii) above, the <strong>Law</strong> <strong>Commission</strong> sought to classify the situation where proposers<br />
can be shown not to have known of a particular circumstance – the <strong>Law</strong> <strong>Commission</strong> distanced itself from<br />
the constructive knowledge epithet used in the Working Paper, and was content to recommend that a<br />
proposer:<br />
―Should be assumed to know a material fact if it would have been ascertainable by reasonable<br />
enquiry and if a reasonable man applying for the insurance in question would have ascertained<br />
it.‖<br />
3.84 In relation to (iii) above, the English <strong>Law</strong> <strong>Commission</strong> explained that the words, ―in the position<br />
of the proposer‖, had been employed in order to make it clear that the negotiating parties and ultimately<br />
the court were not being invited to consider the idiosyncrasies of the proposer – education, intellectual<br />
ability etc: the test directs the court ―to have regard to the knowledge and experience to be expected of a<br />
reasonable person in the position of the applicant. Thus, more would be expected of the large company<br />
with an insurance division than of the small shopkeeper.‖ 109<br />
3.85 In cases where insurance cover was obtained via the use of proposal forms, the English <strong>Law</strong><br />
<strong>Commission</strong> retreated from the position taken in the Working Paper whereby an insurer would be deemed<br />
to have waived any need for disclosure, save in respect of specific questions directed at the proposer.<br />
Furthermore, general questions were to be impermissible under paragraph 74 of the Working Paper.<br />
Following upon representations from the insurance industry, the English <strong>Law</strong> <strong>Commission</strong> decided to<br />
support a residual duty of disclosure where a proposer would be aware of facts any reasonable person<br />
would consider relevant to the risk, citing inter alia the example of the hypothetical proposer for fire<br />
insurance who has received arson threats to property. The <strong>Law</strong> <strong>Commission</strong> also reaffirmed the<br />
legitimacy of using general questions to elicit further information on the basis that the proposer gets the<br />
benefit of having his/her attention drawn to the existence of the duty.<br />
3.86 While the <strong>Law</strong> <strong>Commission</strong> recognised that this approach left open the central weakness of the<br />
existing law – answering specific questions did not supplant the duty to volunteer material facts, the <strong>Law</strong><br />
<strong>Commission</strong> felt that the general reforms, and residual doctrines such as waiver, would go some way<br />
towards addressing this point. However, the <strong>Law</strong> <strong>Commission</strong> suggested that the use of ―certain clear<br />
and explicit warnings to the insured, presented in a prominent manner, together, with appropriate<br />
sanctions wherever such warnings have not been given‖ 110 afforded a more practical solution than inviting<br />
litigation over whether general questions in a proposal form have triggered a new duty of disclosure. The<br />
<strong>Law</strong> <strong>Commission</strong> went on to provide a number of recommended warnings and suggested that, in general,<br />
the appropriate sanction for non compliance will be to deny the insurer the right to rely on any failure by<br />
the insured to disclose any material fact, save where the insurer‘s failure was not prejudicial to the<br />
proposer.<br />
3.87 The 1980 <strong>Law</strong> <strong>Commission</strong> Report sought to present a reform model that was essentially<br />
unitary in nature. With the exception of MAT insurance, the central duty of disclosure did not distinguish<br />
between consumer insureds, and what would now be small to medium enterprise (SME) proposers, and<br />
large company/multinational proposers. However, the tests found in several of the recommendations –<br />
references to ―the position of the proposer‖ as distinct from a proposer ―in his circumstances‖, the<br />
standard recommended in the Working Paper, had the advantage of allowing the court to differentiate<br />
between the individual circumstances of the proposer, the nature and size of the risk, and the<br />
circumstances in which the contract was negotiated such as broker involvement.<br />
109<br />
110<br />
Cmnd 8064, para 4.51.<br />
Ibid, paragraph 460. A similar approach has been taken in the 1998 and 2003 South African Statutes:<br />
materiality is tested by reference to ―the point of view of the notional reasonable and prudent person‖ – per<br />
Boruchowitz J in Mahadeo v Direct Dial <strong>Insurance</strong> Ltd 2008(4) SALR 80 at 86.<br />
84
(10) Australia<br />
3.88 In ALRC Report No. 20, <strong>Insurance</strong> <strong>Contracts</strong>, 111 the Australian <strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong><br />
examined misrepresentation and non disclosure together and concluded that the duty of disclosure<br />
required modification on the basis that while the duty can require proposers to reveal facts which, as a<br />
reasonable man, the proposer should appreciate as being relevant, the duty may also require disclosure<br />
of facts of whose relevance the proposer is rightly ignorant. The ALRC was tempted to suggest that the<br />
duty should be re-cast as a duty not to conceal a material fact, avoidance not being avoidable for<br />
innocent non disclosure. A residual duty of disclosure was to be balanced by a shift to the ―reasonable<br />
insured‖ standard, with a duty being placed on the proposer to give the proposer a clear and prominent<br />
warning at the time when the proposal form is filled in. However, the ALRC felt that difficulties of proof<br />
made a ―fraudulent concealment‖ standard impractical; the ALRC ultimately recommend that:<br />
―the duty of disclosure should be retained in modified form. An insurer which wishes to rely on<br />
innocent non-disclosure should warn the insured of his duty of disclosure before the contract is<br />
entered into. The duty should itself extend to facts which the insured knew, or which a<br />
reasonable person in the insured‘s circumstances would have known, to be relevant to the<br />
insured‘s assessment of the risk.‖ 112<br />
3.89 The <strong>Insurance</strong> <strong>Contracts</strong> Act 1984 sought to separate the (post contractual) duty of utmost<br />
good faith from any pre-contractual obligations placed upon the proposer. Although Professor Merkin<br />
comments that this boundary ―has given rise to some difficulty under the 1984 Act‖ 113 he summarises the<br />
redacted duty of disclosure thus:<br />
―As regards disclosure, the assured‘s duty of disclosure is retained by s.21, but is subject to<br />
three significant restrictions: the test of materiality is no longer based on the prudent<br />
underwriter but rather focuses on the prudent assured; under s.21A the duty of disclosure is<br />
waived in respect of most forms of domestic policy unless the insurers have asked specific<br />
questions; and under s.22 the insurers are under a duty to inform the assured of the duty of<br />
disclosure, failing which they cannot rely on it unless the assured has been fraudulent.‖ 114<br />
3.90 Any analysis of the duty of disclosure must take account of how the law reacts to noncompliance<br />
and the 1984 legislation does this. The major changes to the provisions on remedies involve<br />
an analysis of the state of mind of the proposer on completion of the proposal form. Absent fraud, the<br />
insurer will in general be put in the position they would have been in had there been no breach of duty:<br />
s.28. Pre contractual non disclosure and misrepresentation are normally addressed by reference to the<br />
presence or absence of fraud particularly on the question whether the insurer can avoid the policy. Post<br />
contractual breaches of the implied duty of good faith are answered by reference to contractual remedies.<br />
(11) New Zealand<br />
3.91 In contrast to Australia, the New Zealand provisions relating to non disclosure have been<br />
somewhat tentative. Some of the provisions in the New Zealand 1977 reform legislation were<br />
innovative, 115 but on the duty of disclosure the 1977 legislation was silent. The position in New Zealand is<br />
a complex one because life insurance is regulated in a separate statute that goes back to 1908, and the<br />
<strong>Insurance</strong> <strong>Law</strong> <strong>Reform</strong> Act 1977 must be seen in the context of innovative New Zealand contract law<br />
statutes such as the Contractual Mistakes Act 1977 and the Contractual Remedies Act 1979, statutes that<br />
have addressed many of the remedial shortcomings of the common law of contract. Because of the<br />
closeness of the Australian and New Zealand insurance markets, the two post 1984 New Zealand <strong>Law</strong><br />
<strong>Commission</strong> Reports look closely at Australian reform measures, especially on disclosure.<br />
111<br />
112<br />
113<br />
114<br />
115<br />
ALRC Report No. 20, para. 175.<br />
ALRC Report No. 20, para. 183.<br />
Merkin, ―<strong>Reform</strong>ing <strong>Insurance</strong> Contract <strong>Law</strong>: Is there a case for Reverse Transportation?‖ Para. 3.6.<br />
Ibid,para. 3.7: Lewins, ―<strong>Reform</strong>ing Non-Disclosure in <strong>Insurance</strong> <strong>Law</strong>: The Australian Experience‖ [2008] JBL<br />
158.<br />
<strong>Insurance</strong> <strong>Law</strong> <strong>Reform</strong> Act 1977 (eg sections 4 to 7 on misrepresentation).<br />
85
3.92 In the two subsequent reports the New Zealand <strong>Law</strong> <strong>Commission</strong> has sought to restrict the<br />
insurer‘s common law right to avoid a contract of non disclosure to cases where:<br />
the insurer seeks to avoid the contract within 10 working days of the risk attaching, giving an<br />
insurer time to inquire into facts, especially on provisional insurance matters;<br />
the contract is one of re-insurance;<br />
the non disclosure relates to a fact that the proposer either knew, or that, a reasonable person in<br />
the circumstances would have known would have influenced the judgment of a prudent insurer in<br />
fixing the premium or deciding to take the risk on substantially the same terms;<br />
the answer given to a question that was expressly asked is substantially incorrect, because of<br />
the non disclosure;<br />
In the case of a prospective avoidance, ie the insurer seeks to exercise the common law right<br />
before the risk materialises, such a common law right should not be affected.<br />
3.93 The New Zealand <strong>Law</strong> <strong>Commission</strong>, in its 1998 Report examined the Australian reforms of<br />
1984 but did not recommend that New Zealand law should be reformed along Australian lines, concluding<br />
that these provisions in Australia made the scope of the duty uncertain and that the proportionality<br />
remedies ―involve difficult assessments as to the insurers likely response had the insured disclosed the<br />
information.‖ 116 These New Zealand proposals were described in the 2004 Report as ―provisional<br />
measures‖, 117 pending a fuller review when the 2003 Australian Treasury Review of the 1984 Act was<br />
completed. 118<br />
(12) The Principles of European <strong>Insurance</strong> Contract <strong>Law</strong> (PEICL)<br />
3.94 The PEICL authors have set out a number of proposals that qualify the duty of disclosure and<br />
restrict the insurer‘s right to avoid the policy save in cases of fraudulent breach. The applicant‘s precontractual<br />
information duty, insofar as the provisions are relevant to this chapter are as follows:<br />
Article 2:101<br />
Duty of Disclosure<br />
(1) When concluding the contract, the applicant shall inform the insurer of circumstances of<br />
which he is or ought to be aware, and which are the subject of clear and precise<br />
questions put to him by the insurer.<br />
(2) The circumstances referred to in para.1 include those of which the person to be insured<br />
was or should have been aware.<br />
(3) The insurer shall not be entitled to terminate the contract if the policyholder is in innocent<br />
breach of Article 2:101, unless the insurer proves that it would not have concluded the<br />
contract, had it known the information concerned.<br />
Article 2:102 sets out provisions governing breach of Article 2:101, specifically an insurer‘s right to<br />
propose a reasonable variation of the contract or elect to terminate the contract. Termination for innocent<br />
breach requires the insurer to prove that it would not have concluded the contract had it known the<br />
information concerned. Where the insured event occurs prior to variation or termination, and it is caused<br />
by an element of the risk that was the subject of negligent non-disclosure or misrepresentation by the<br />
policyholder, no insurance money is payable if the insurer would not have concluded that contract.<br />
Where the premium would have been adjusted however, a proportionality remedy will be available to the<br />
insurer. Article 2:102 is governed by Article 3:103:<br />
116<br />
117<br />
118<br />
Some <strong>Insurance</strong> <strong>Law</strong> Problems (NZLC R-46)(1988). The second report, from 2004 Life <strong>Insurance</strong> (NZLC R-<br />
87)(2004) with text of a draft Bill appended. For the text of these proposals see Draft Bill, clauses 14 and 15.<br />
See the 1988 Report, para. 23; 2004 Report, para. 8.33.<br />
Paragraph 8.40<br />
86
Article 3:103<br />
Exceptions<br />
The sanctions provided for in Article 2:102 shall not apply in respect of<br />
(a) a question which was unanswered, or information supplied which was obviously<br />
incomplete or incorrect;<br />
(b) information which should have been disclosed or information inaccurately supplied,<br />
which was not material to a reasonable insurer‘s decision to enter into the contract at<br />
all, or to do so on the agreed terms;<br />
(c) information which the insurer led the policyholder to believe did not have to be<br />
disclosed;<br />
(d) information of which the insurer was or should have been aware.<br />
Article 2:104<br />
Fraudulent Breach<br />
Without prejudice to the sanctions provided for in Article 2;102, the insurer shall be entitled to<br />
avoid the contract by the policyholder‘s fraudulent breach of Article 2:101. Notice of avoidance<br />
shall be given to the policyholder in writing within two months after the fraud becomes known to<br />
the insurer.<br />
(13) British Consumer <strong>Insurance</strong> (Disclosure and Representations) Bill 2011<br />
3.95 In a series of documents, ranging from a 2007 Joint Consultation Paper to the Consumer<br />
<strong>Insurance</strong> (Disclosure and Representations) Bill, 119 the <strong>Law</strong> <strong>Commission</strong>s have sought to promote<br />
changes in relation to the duty of disclosure, misrepresentation and warranties. The 2007 Consultation<br />
Paper initially contained recommendations in respect of all three topics, addressing these problems in<br />
respect of consumer and business insurance. The 2009 Report and 2011 Bill however confined<br />
themselves to consumer insurance and misrepresentation. The difficulty in getting agreement on<br />
reforming commercial insurance appears to be the main reason for this revised approach.<br />
3.96 In the sole context of consumer insurance the <strong>Law</strong> <strong>Commission</strong>s, 120 in their December 2009<br />
Report and 2011 Bill, recommended that the section 17 duty of utmost good faith in consumer contracts,<br />
be replaced by a duty to take reasonable care not to make a misrepresentation. This duty should apply<br />
vis-a-vis disclosure and representations to the insurer by the consumer proposer. This amends both<br />
section 17 and any common law rule but does not supplant any post formation duty of utmost good faith<br />
that the consumer may be under (save in cases of variation of an insurance contract).<br />
3.97 The Consumer <strong>Insurance</strong> (Disclosure and Representations) Bill 2011, introduced into the<br />
House of Lords by the UK Government in 2011, is the first legislative proposal to emerge from the<br />
deliberations of various law reform agencies in Britain dating back to the 1957 Report. This Bill is seen as<br />
being non-controversial and the <strong>Law</strong> <strong>Commission</strong>s are of the view that, in the words of <strong>Law</strong><br />
<strong>Commission</strong>er David Hertzell:<br />
―The introduction of this Bill is a significant achievement. This is the first time that consumer<br />
groups and the insurance industry have reached a consensus on this issue.‖ 121<br />
3.98 Clause 1 of the 2011 Bill confines the reforms to consumers who enter or propose to enter a<br />
consumer insurance contract, defined as a contract of insurance between a person who carries on the<br />
119<br />
120<br />
121<br />
Joint Consultation Paper, <strong>Insurance</strong> Contract <strong>Law</strong>: Misrepresentation, Non-Disclosure and Breach of Warranty<br />
by the Insured (Consultation Paper No 182); Consumer <strong>Insurance</strong> <strong>Law</strong>: Pre-contract Disclosure and<br />
Misrepresentation (<strong>Law</strong> Com No 319); Consumer <strong>Insurance</strong> (Disclosure and Representations) Bill 2011 (HL<br />
Bill 68).<br />
<strong>Law</strong> Com No 319.<br />
May 17 2011 Press Release.<br />
87
usiness of insurance (with or without the necessary legislative permissions) and ―an individual who<br />
enters into the contract wholly or mainly for purposes unrelated to the individual‘s trade, business or<br />
profession.‖<br />
3.99 In relation to the duty of disclosure, clause 2(4) provides that the duty set in clause 2(2) of the<br />
Bill ―replaces any duty relating to disclosure or representations by a consumer to an insurer which existed<br />
in the same circumstances before this Act applied.‖ The clause 2(2) duty is ―the duty of the consumer to<br />
take reasonable care not to make a misrepresentation to the insurer.‖ Clause 2(5) modifies any rule of<br />
law stating that a consumer insurance contract is one of the utmost good faith, to the extent required by<br />
the Bill and renders section 17 of the Marine <strong>Insurance</strong> Act 1906 subject to the provisions of the Bill<br />
insofar as it is a consumer insurance contract. Clause 11(1)(a) of the Bill completes the process of<br />
closing off non-disclosure which does not involve a misrepresentation by the consumer proposer by<br />
providing that any rule of law having the same effect as section 18 of the Marine <strong>Insurance</strong> Act 1906 is<br />
abolished. Section 18 of the 1906 Act is also rendered inapplicable to contracts of marine insurance<br />
which are consumer insurance contracts, this being achieved via clause 11(2), adding a new subsection<br />
(6) to section 18 of the 1906 Act.<br />
F<br />
General Conclusions<br />
3.100 The net effect of the reforms in the 2011 Bill will be to remove any duty that the proposer was<br />
generally under to disclose material facts even if unprompted by a question. It is not so clear however<br />
whether the insurer may ask questions that may, through the back door, reinstate a right of avoidance by<br />
inducing the proposer to make a material misrepresentation. The <strong>Commission</strong> considers that this danger<br />
becomes evident when one considers the background to the 2011 Bill. Although the <strong>Law</strong> <strong>Commission</strong>s,<br />
in the December 2009 Report and draft Bill recommend the abolition of the duty of disclosure – more<br />
specifically a consumer‘s duty to volunteer information – it is suggested that, because the <strong>Law</strong><br />
<strong>Commission</strong>s recommended that insurers would be entitled to ask general questions as well as<br />
detailed/precise ones, a general question in a proposal form might render the abolition of the duty to<br />
volunteer information ineffective. The <strong>Law</strong> <strong>Commission</strong>s wrote in December 2009:<br />
―To take an example raised by a broker in their response: a buildings policy proposal might ask<br />
―are there any other hazards we should know about?‖ We think that a consumer who makes<br />
fireworks at home would be required to mention this fact. This hazard is so obvious and<br />
extreme that it is the sort of thing that a reasonable consumer would mention. However, it may<br />
not be reasonable to expect consumers to state that they lived near rivers: if insurers want<br />
information to assess flood risk, they should ask for it.‖ 122<br />
3.101 The <strong>Commission</strong>‘s view is that if the hazard is ―so obvious and extreme‖ then a recalibrated<br />
duty of disclosure, requiring a proposer to volunteer special facts highly relevant to the risk, should remain<br />
in place. Such a horizontal duty, applying to both consumer and business proposers seeking standard,<br />
mass market insurance products, would keep the law relatively simple and indeed avoid introducing<br />
additional complexities into the law such as whether or not a general question was included in the<br />
proposal form. In the case of the Battle of the Boyne Cottage dispute, the cottage displaying the mural<br />
depicting the 1690 Battle of the Boyne had been a tourist attraction for most of the 25 years that preceded<br />
the opening of the official visitor centre that probably precipitated the arson attack on Frank Godfrey‘s<br />
property. Such facts could raise similar issues to the hypothetical fireworks enthusiast mentioned by the<br />
<strong>Law</strong> <strong>Commission</strong>s above and it may also add the complication of a business or dual use activity question,<br />
thus raising issues of classification across boundaries such as consumer/non consumer insurance and<br />
consumer/small business insurance. The <strong>Commission</strong> would prefer to retain a duty of disclosure, in a<br />
significantly redacted form, with bilateral pre-contractual duties to take reasonable care in transferring and<br />
processing information, which, after all, are at the core of the utmost good faith principle.<br />
3.102 In conclusion, and subject to the provisional recommendations for reform already made, the<br />
<strong>Commission</strong> considers it is useful to set out here why, in general terms, the duty of disclosure should be<br />
retained:<br />
122<br />
<strong>Law</strong> Com No 319, para 5.34.<br />
88
it is desirable to retain the duty; it is regarded as a necessary part of the PEICL and is an integral<br />
part of the common law in countries like Australia and New Zealand<br />
the existing law of insurance does not distinguish between consumer contracts and commercial<br />
contracts. The <strong>Commission</strong> sees no necessity to introduce such a distinction now<br />
apart from insurance contract law, consumer proposers and insureds will be able to rely on other<br />
statutory reliefs via the Unfair <strong>Contracts</strong> Terms Regulations and the Consumer Protection Act<br />
2007, as well as continue to use the Financial Services Ombudsman service<br />
the <strong>Commission</strong> considers that a redacted duty of disclosure, one which clarifies and narrows<br />
down the duty, provides a uniform approach to disclosure issues, with the benefit of greater<br />
certainty and ease of application, afford benefits that should not be undervalued. There will still<br />
be marginal situations even where the consumer proposer will be aware of facts and<br />
circumstances that, should be disclosed so as to allow the insurer to assess the risk and set the<br />
terms, and the <strong>Commission</strong> believes these situations can best be policed by reference to issues<br />
of negligent or fraudulent non-disclosure<br />
such a uniform duty of disclosure avoids difficult marginal issues of definition eg mixed use<br />
insureds. The <strong>Commission</strong> notes that the <strong>Law</strong> <strong>Commission</strong>‘s approach sits uneasily with<br />
recognition that small businesses obtain insurance cover much in the same way that consumers<br />
do, increasingly via telephone or on-line with no broker assistance. 123<br />
3.103 The <strong>Commission</strong> provisionally recommends that the insurer should be under a statutory duty to<br />
explain to a proposer both the nature of the duty of disclosure and the consequences of non-disclosure.<br />
123<br />
Issues Paper 5, April 2009, Micro Businesses.<br />
89
4<br />
CHAPTER 4<br />
PRE-CONTRACTUAL MISREPRESENTATION AND INSURANCE<br />
CONTRACTS<br />
A<br />
Introduction<br />
4.01 In this Chapter, the <strong>Commission</strong> discusses the duty in section 20 of the Marine <strong>Insurance</strong> Act<br />
1906 to give ―true‖ answers, and discusses this in the wider context of the law on misprepresentation as it<br />
applies to insurance contracts. When a proposer is seeking insurance, the proposer will, in most<br />
instances, be asked a series of questions aimed at eliciting from the proposer information concerning a<br />
variety of facts and circumstances relating to the risk, the proposer‘s circumstances and related matters. 1<br />
Indeed, the proposer may be asked to express his or her opinion concerning matters that the proposer<br />
may have no accurate information on, such as the state of the proposer‘s health, particularly a medical<br />
condition that may not have been diagnosed at that time. This process is perfectly legitimate within the<br />
context of any underwriting exercise which is directed at gathering up ―the special facts upon which the<br />
contingent chance is to be computed, [for] these lie most commonly in the knowledge of the insured<br />
only‖. 2 But the statutory codification of insurance contract law effected by the Marine <strong>Insurance</strong> Act 1906<br />
is of general application and it is not always predicated on the superior factual knowledge of the proposer.<br />
Section 20(3) of the 1906 Act provides that a representation ―may be either a representation as to a<br />
matter of fact, or as to a matter of expectation or belief.‖ Section 20(5) directs that a matter of<br />
expectation or belief is true if it be made in good faith. It is section 20(1) that creates the central obstacle<br />
to a nuanced and flexible system of responding to inaccurate statements made during negotiations.<br />
Absent some contractual modification, every ―material representation made by the assured…must be<br />
true.‖ Should the representation ―be untrue the insurer may avoid the contract.‖ Avoidance is the sole<br />
remedy available to the parties under section 20.<br />
4.02 Where the insurer is the more reliable source of data and can access a more economic or<br />
efficient means of collecting relevant facts, circumstances or statistical information, the law of<br />
misrepresentation can operate extremely harshly. In historical terms, the primary remedy available in<br />
equity to a person who has been induced into entering into any contract by any misrepresentation is<br />
rescission, that is, the misrepresentee may set aside the contract, often with retrospective and<br />
prospective effect. The contract is voidable and the remedy of rescission is available regardless of the<br />
degree of fault or culpability that can be attributed to the proposer. An innocent misrepresentation entitles<br />
the insurer to rescind the contract because equitable reliefs for misrepresentation did not include more<br />
proportionate responses such as damages in lieu of rescission. The development of alternative causes of<br />
action via contractual express terms, negligent misstatement and under statute, as well as a trend<br />
towards seeing damages as the most appropriate remedy, makes insurance law look increasingly<br />
anachronistic when seen in the broader context of how contract and tort rules and remedies have evolved<br />
in the last 140 years or so. 3<br />
1<br />
2<br />
3<br />
See generally Bakes, ―Pre-Contractual Information Duties and the <strong>Law</strong> <strong>Commission</strong>‘s Review”, in Soyer<br />
<strong>Reform</strong>ing Marine and Commercial <strong>Insurance</strong> <strong>Law</strong> (Informa <strong>Law</strong> 2008); Bennett ―Reflections on Values”, in<br />
Soyer, <strong>Reform</strong>ing Marine and Commercial <strong>Law</strong> (Informa <strong>Law</strong> 2008); Hudson, ―Making Misrepresentations”<br />
(1969) 85 LQR 524.<br />
Lord Mansfield in Carter v Boehm (1766) 3 Burr 1905 at 1909-10.<br />
Rose, ―Informational Asymmetry and the Myth of Good Faith‖ [2008] LMCLQ 181 argues forcefully that the law<br />
that has been applied in relation to insurance contracts concluded on the basis of a misrepresentation is<br />
contract law generally, good faith being limited to non disclosure.<br />
91
B<br />
Judicial approaches to limiting actionable misrepresentation<br />
4.03 There are a number of ways in which the courts have sought to limit the law relating to<br />
actionable misrepresentation.<br />
(1) “Reading down” the statement<br />
4.04 Statements that are laudatory, imprecise or bombastic might be held to be non actionable<br />
―puffs‖. 4 Statements of opinion or belief about a state of facts will only be misrepresentations if the<br />
opinion or belief is not actually held. 5 If the opinion or belief is held, the fact that it may not be the opinion<br />
or belief that a prudent or well informed person would hold is not sufficient to make the resulting<br />
statement as to opinion or belief a misrepresentation.<br />
(2) Honest belief<br />
4.05 In Economides v Commercial Union <strong>Insurance</strong> Ltd 6 the owner of a flat relied upon his father‘s<br />
views as to the value of the contents of the flat when obtaining contents insurance. The replacement<br />
value of the contents considerably exceeded the declared amount (£30,000 as against the £16,000<br />
declared value). The Court of Appeal held that the proposer had an honest belief and reliance upon his<br />
father‘s assessment provided a satisfactory basis for the opinion. Simon Brown LJ pithily observed that<br />
―what the appellant‘s father told him here was a sufficient basis for his representation: he was under a<br />
duty of honesty, not a duty of care‖. 7 However, a statement made on the basis of a pure guess or without<br />
any foundation could well be a fraudulent misrepresentation, and a statement made while ignoring related<br />
facts – ―Nelsonian blindness‖ – will preclude a successful plea of honest belief. 8<br />
4.06 Where the proposer is not however a lay insured then greater knowledge and a higher duty –<br />
one approaching a duty of care – may be expected: Sirius International <strong>Insurance</strong> Corp v Oriental<br />
<strong>Insurance</strong> Corp. 9<br />
(3) Agent liability<br />
4.07 For present purposes it is sufficient to state that Irish case-law 10 clearly allows the insurer to<br />
avoid the policy on the basis of a proposer‘s agent‘s misrepresentation:<br />
―The agent owes his client a duty to take reasonable skill and care in assisting him to complete<br />
a proposal form where that is required. If the agent himself fills in the form he must be careful<br />
to check with the proposer that the answers are correct. The fact that the proposer should<br />
check the answers before signing the proposal form does not necessarily relieve the agent of<br />
responsibility for misstatements due to his negligence‖ 11<br />
(4) Ambiguous questions<br />
4.08 The issue of how ambiguous or misleading questions are to be treated by the proposer 12 has<br />
been examined by the Irish judiciary on a number of occasions. While ambiguity may arise in relation to<br />
4<br />
5<br />
6<br />
7<br />
8<br />
9<br />
10<br />
11<br />
12<br />
Smith v Lynn (1954) 8 ILTR 57.<br />
As section 20(5) of the 1906 Act requires statements of opinion to be true but provides a statement will be<br />
deemed to be true if it is honestly held, issues of fraud via recklessness arise as in McAleenan v AIG (Europe)<br />
Ltd [2010] IEHC 128.<br />
[1998] QB 587.<br />
Ibid. See also Zeller v British Caymanian <strong>Insurance</strong> Co Ltd [2008] UKPC 4.<br />
See Vincent, Nelson (New Haven), p. 424 on Nelson‘s use of a telescope against his blind eye at the Battle of<br />
Copenhagen. On statements of fact and belief generally see Bennett, (1998) 61 MLR 886.<br />
[1999] 1 All ER (Comm) 699; McAleenan v AIG Europe Ltd [2010] IEHC 128.<br />
Chariot Inns v Assicurazioni Generali SPA [1981] IR 199.<br />
For harsh results of this rule see Connors v London and Provincial Assurance Co (1913) 47 ILTR 148. See<br />
however section 51 of the <strong>Insurance</strong> Act 1989.<br />
MacGillivray on <strong>Insurance</strong> <strong>Law</strong>, 11th ed (Sweet & Maxwell 2008) at 36-28.<br />
92
verbal or written questions at formation stage, as well as at post formation stage vis-à-vis policy terms<br />
and exclusions, the weight of Irish authority is in favour of viewing and interpreting ambiguous questions<br />
in a proposal form, and provisions within the policy itself against the party who prepared the question or<br />
contract term. In Rohan Construction Ltd v <strong>Insurance</strong> Corporation of Ireland Ltd 13 Keane J cautioned<br />
against giving a meaning to a contractual term which is strained or artificial:<br />
―if there is any ambiguity in the language used it is to be construed more strongly against the<br />
party who prepared it, i.e. in most cases against the insurer. It is also clear that the words<br />
used must not be construed with extreme literalism, but with reasonable latitude, keeping<br />
always in view the principal object of the contract of insurance‖<br />
4.09 In the context of ambiguities in a proposal form the leading case is Re Sweeney & Kennedy's<br />
Arbitration. 14 An application form asked the proposer if any of his drivers are ―under 21 years of age or<br />
with less than 12 months experience‖. The proposer truthfully answered in the negative but at a later<br />
date he hired a driver who failed to satisfy these conditions. An attempt to avoid the policy on the basis<br />
that a promissory warranty as to the future was implicitly built into the contract failed. In Analog Devices<br />
BV v Zurich <strong>Insurance</strong> Company, 15 the Supreme Court has specifically endorsed the view that exclusions<br />
from cover in an ―all risks‖ policy should be read contra proferens. More recently, in McAleenan v AIG<br />
(Europe) Ltd 16 Finlay Geoghegan J has reaffirmed these propositions in the context of professional<br />
indemnity insurance, pointing out however that contra proferens interpretation only arises if there is an<br />
ambiguity in the first place, Finlay Geoghegan J finding such an ambiguity over whether the policy in<br />
question was a composite and not a joint policy, creating individual contractual rights for employees of the<br />
firm.<br />
4.10 While Keane J‘s view in Rohan Construction and the contra proferens approach mandated in<br />
Analog are not necessarily irreconcilable, there is a tension between these approaches in the sense that<br />
reading a clause against the party who prepared it need not necessarily be the same approach as giving<br />
the question or term the meaning that a reasonable person would deduce from the words themselves.<br />
There are English cases that do not favour contra proferens interpretation of exclusions, 17 and after the<br />
House of Lords had distanced itself from a priori rules of construction in Investors Compensation Scheme<br />
Ltd v West Bromwich Building Society, 18 there is a clear movement away from using the contra proferens<br />
approach in insurance contracts. In McGeown v Direct Travel <strong>Insurance</strong> 19 Auld LJ said that too early a<br />
recourse to contra proferentem involved a danger of creating an ambiguity where there is none. Clarke J,<br />
in Danske Banke v McFadden 20 has recently expressed agreement with the view that the contra<br />
proferens approach to interpretation may not be suitable where contractual terms may have been<br />
individually negotiated, and in any event Clarke J did not find it of assistance in interpreting the terms of a<br />
guarantee coauthored as a joint effort by the parties.<br />
4.11 It may be that the issue of how to interpret an ambiguous question should best be left for future<br />
judicial development. In Analog the Supreme Court specifically endorsed both contra proferens<br />
interpretation and Lord Hoffmann‘s speech in West Bromwich and the tension between these approaches<br />
13<br />
14<br />
15<br />
16<br />
17<br />
18<br />
19<br />
20<br />
[1986] ILRM 419. See also Walkers v London and Provincial <strong>Insurance</strong> Co (1888) 22LR Ir 572.<br />
[1986] ILRM 419.at 423-4: see Griffin J‘s ―reasonable persons‖ test in the Supreme Court [1988] ILRM 373.<br />
[1950] IR 85.<br />
[2010] IEHC 128; Emo Oil Ltd v Sun Alliance [2009] IESC2.<br />
See also O‟Reilly v Irish Life Assurance plc [2005] IEHC 449 (rejection of consumer insured test).<br />
[1998] 1 All ER 98.<br />
[2004] 1 All ER (Comm) 609. In Clear Homes v Sarcon No 177 Ltd [2010] NI Ch 16 Deeny J characterised<br />
contra proferens, in the light of Lord Hoffmann‘s analysis, as a rule of last resort when all other rules of<br />
interpretation fail.<br />
[2010] IEHC 116, citing in particular Levinson v Farin [1978] 2 AllER 1149 and Oxonica Energy Ltd v Neuftec<br />
Ltd [2008] EWHC 2127 (Pat).<br />
93
will no doubt arise in the future. On the other hand, greater legal certainty will be engendered via a<br />
statutory solution.<br />
4.12 The Australian judiciary has adopted what the 1982 ALRC Report 21 described as a rule of fair<br />
and reasonable construction, an approach that the Privy Council endorsed in Condogianis v Guardian<br />
Assurance Co, 22 in contrast to an approach endorsed by Isaacs J in the High Court of Australia in which it<br />
was argued that a question which the proposer bona fide believes to have a certain meaning should be<br />
favoured, as long as that meaning was not beyond the bounds of reason. This issue has been resolved<br />
in the Australian 1984 Act, s.23 of which provides in part that:<br />
―Where:<br />
(a) a statement is made in answer to a question asked in relation to a proposed contract<br />
of insurance…and<br />
(b) a reasonable person in the circumstances would have understood the question to<br />
have the meaning that the person answering the question apparently understood it to<br />
have;<br />
that meaning shall, in relation to the person who made the statement, be deemed to be the<br />
meaning of the question.‖<br />
4.13 In commenting on s.23 Professor Merkin noted that the section represents a departure from<br />
contra proferens interpretation and that it applies regardless of whether the proposal form is drafted by<br />
the insurer or the broker. 23<br />
4.14 The <strong>Commission</strong> provisionally recommends that legislation should provide that the insurer shall<br />
ensure that any question posed in writing to the proposer is drafted in plain , intelligible language; that any<br />
such question should be specific as to the information being sought by the insurer; and that where there<br />
is a doubt about the meaning of any question, it should be interpreted by reference to a standard of what<br />
is fair and reasonable.<br />
(5) Interpretation of Ambiguous Answers<br />
4.15 In Condogianis v Guardian Assurance Co 24 the Privy Council expressed the view that the rule<br />
of fair and reasonable construction was also to be applied to answers given in response to questions. A<br />
literal interpretation will not be applied if answers given in relation to a question relating to past or existing<br />
fact, as distinct from future intention or events, are in substance false. Contrast Holt's Motors Ltd v South<br />
East Lancashire <strong>Insurance</strong> 25 with Re Sweeney & Kennedy's Arbitration. 26<br />
(6) Are questions asked presumed to be seeking to identify material facts?<br />
4.16 Where specific questions are contained in a proposal form and the question is answered<br />
incorrectly, can the insurer avoid the policy on the ground that the answer was false? This is certainly<br />
likely to be the case if a warranty or basis of contract clause is present, but a false answer per se will not<br />
necessarily allow avoidance, save in relation to matters of fact – see section 20(5). The Materiality<br />
question will also be relevant. Section 20(1) of the Marine <strong>Insurance</strong> Act 1906 requires the<br />
representation to be material, that is, it would influence the prudent insurer in deciding to fix the premium<br />
or take the risk.<br />
21<br />
22<br />
23<br />
24<br />
25<br />
26<br />
Report No. 20 <strong>Insurance</strong> <strong>Contracts</strong> para 169.<br />
(1921) 29 CLR 341. See also Revell v Lords General <strong>Insurance</strong> Company Ltd [1934] 50 Lloyd‘s List LR 114<br />
and R & R Developments Ltd v Axa <strong>Insurance</strong> Plc [2010] Lloyd‘s Rep 521.<br />
Merkin, ―<strong>Reform</strong>ing <strong>Insurance</strong> contract <strong>Law</strong>: Is there a case for Reverse Transportation?‖ Para 4.29.<br />
(1923) 29 CLR 341.<br />
(1930) 35 Com. Cas 281.<br />
[1950] IR 85.<br />
94
4.17 Case-law also prescribes an inducement test. 27 Can an insurer satisfy materiality and<br />
inducement by pointing to specific questions which are intended to obtain information on which the<br />
proposer has answered incorrectly? This point is answered succinctly by the <strong>Law</strong> <strong>Commission</strong>s in the<br />
2007 Consultation Paper:<br />
―It might be thought that when a proposal form asks a question, the answer would always be<br />
material and, if it were inaccurate, would amount to a misrepresentation. However this is not<br />
so. Many questions are asked in rather general terms and it is difficult to know the full extent of<br />
what is wanted. For example, an insured who is asked if they have had medical tests for<br />
illness may not interpret this as referring to routine tests (for example blood pressure checks)<br />
or even to non-routine tests that were completely negative. Their answer may be inaccurate or<br />
incomplete. Whether the insurer will have a remedy depends on whether or not the incorrect<br />
or missing information was material within the meaning of section 20(2). If it was, the insurer<br />
will have a remedy for misrepresentation. If it was not, the insurer will have no remedy even<br />
though the proposer knew that its answer was not wholly accurate.‖ 28<br />
4.18 In the context of privacy law and data protection the insurer is only entitled to information that<br />
can be held to be within the data protection principles, one of which is that a data controller must only<br />
obtain personal data that is adequate, relevant and not excessive ―vis-à-vis the processing operations for<br />
which the personal data is intended.‖ These processing operations themselves must be ―specified,<br />
explicit and lawful‖ and the Code of Practice on Data Protection for the <strong>Insurance</strong> Sector (2008) 29<br />
provides that the Data Protection <strong>Commission</strong>er will examine the data capture practices of insurers ―on<br />
an ongoing basis to ensure that only relevant information is sought and provided.‖ In fact the<br />
<strong>Commission</strong>er, in Case Study 1 of 2002 held that when insurance companies sought to collect personal<br />
data relating to marital status as a standard question, this practice could not be relevant to issues of risk<br />
and motor insurance. The <strong>Commission</strong>er was ―pleased to read that the companies agreed to delete the<br />
question and I trust [he wrote] that all companies in the industry are so doing.‖ At paragraph 4.99 of the<br />
2007 Consultation Paper the <strong>Law</strong> <strong>Commission</strong>s however suggest that consideration should be given to<br />
enacting a statutory presumption that the proposer would know that an issue is relevant to the insurer if a<br />
specific question about that issue is asked by the insurer. The 2009 Report 30 and clause 5(5)(b) of the<br />
Consumer <strong>Insurance</strong> (Disclosure and Representations) Bill 2011 provides such a presumption within the<br />
context of an insurer‘s contention that the proposer acted fraudulently. While the <strong>Commission</strong> sees some<br />
force in such a presumption, applying as it does to specific questions only, the <strong>Commission</strong> questions<br />
whether such a presumption would be useful to insurers at formation of the contract stage. However<br />
there may be some practical disadvantages. Such a presumption might encourage some insurers to<br />
make the task of completing proposal forms burdensome and unduly inquisitive and bring about situations<br />
that privacy law and the data protection principles are intended to prevent.<br />
(7) Is a failure to answer questions misrepresentation?<br />
4.19 Where the questions are set out in a proposal form and the proposer provides no answer or an<br />
obviously incomplete answer, the courts have often struggled to provide a satisfactory response. At one<br />
level a proposer who leaves a question blank might be suspected of doing so because he/she is unwilling<br />
to provide information (eg on a criminal record or history of illness). Such conduct is consistent with<br />
fraudulent concealment. On the other hand the question may not be answered because it is clearly<br />
irrelevant, either in the view of the proposer or on any objective basis. Some proposal forms seek to deal<br />
with this by directing that if an answer is not provided to a specific question it will be deemed to be a<br />
negative answer, but MacGillivray gives examples of how such a deeming provision may not address<br />
27<br />
28<br />
29<br />
30<br />
Pan Atlantic <strong>Insurance</strong> v Pine Top <strong>Insurance</strong> [1994] 3 All ER 581.<br />
Para 225.<br />
www.dataprivacy.ie.<br />
Paragraph 6.33 of <strong>Law</strong> Com 319.<br />
95
questions that are incapable of a yes/no answer. 31 The ALRC suggested that provisions of this kind<br />
should be ―rendered ineffective. They lead to uncertainty and confusion.‖ 32<br />
4.20 The ALRC instead took a very robust approach to the problem although this issue was treated<br />
as a non-disclosure issue.<br />
―An insurer should be deemed to have waived the duty of disclosure to the relevant extent<br />
where it has failed to pursue unanswered or obviously incompletely answered questions<br />
contained in a proposal form. If an insurer requires more information, it should make further<br />
inquiry.‖ 33<br />
4.21 This is an area of law where the non-disclosure and misrepresentation fields overlap but the<br />
ALRC proposal has the advantages of clarity and consistency. The <strong>Law</strong> <strong>Commission</strong>s also cite this<br />
approach with enthusiasm, observing that where a question has been met with an obviously incomplete<br />
answer ―the onus should be on the insurer either to decline the application or follow up the issue with the<br />
insured.‖ 34 The Consumer <strong>Insurance</strong> (Disclosure and Representations) Bill 2011 does not however<br />
contain a provision like section 21(3) of the Australian 1984 Act. While there are some relevant<br />
provisions in the 2011 Bill, the <strong>Commission</strong> believes that there is a lack of clarity on this point. Clause<br />
2(2) imposes a duty on the consumer to take reasonable care not to make a misrepresentation to the<br />
insurer, but silence will not constitute a misrepresentation in ordinary contract law. Clause 3(3) states<br />
that the failure by an insurer to comply with an insurers request to confirm or amend previously submitted<br />
particulars may be a misrepresentation, suggesting that should no follow up request be made, an<br />
incomplete form will not include any misrepresentations by virtue of unanswered questions. There are<br />
decisions under the <strong>Insurance</strong> Ombudsman of Ireland complaints procedures where the failure to follow<br />
up an incomplete proposal forms in relation to material matters affected the insurer‘s right to avoid the<br />
policy, the Ombudsman deciding on a proportionate remedy 35 or settlement.<br />
4.22 There is another point where the <strong>Commission</strong> thinks it would be desirable to be clearer than<br />
the UK 2011 Bill appears to be. Take the case of a proposer who left a question blank (eg ―have you ever<br />
suffered from clinical depression‖) when the proposer should answer yes. The proposer‘s hope that the<br />
insurer overlooks the omission is realised, and the misstatement comes to light much later. Is this a case<br />
of fraudulent omission or concealment that might trigger avoidance? The formula in section 27 of the<br />
Australian Act – omission is not a misrepresentation ―by reason only‖ of the failure would be of<br />
assistance, suggesting that other factors may justify a conclusion of fraud.<br />
4.23 The <strong>Commission</strong> provisionally recommends that if an insurer does not follow up on the failure<br />
by the proposer to answer a question, or in respect of an obviously incomplete answer, this should be<br />
regarded as a waiver by the insurer of the duty of disclosure and the duty to answer questions honestly<br />
and fairly; this would not apply where there has been fraudulent concealment by the proposer (intentional<br />
or reckless concealment)<br />
4.24 This solution would leave it open to a court to hold that, on the facts, the proposer was aware<br />
of the incomplete nature of the answer and had abstained from giving a complete answer in order to<br />
conceal material facts. As the <strong>Commission</strong> has proposed the retention of a redacted duty of disclosure<br />
as well as allowing an insurer appropriate relief against misrepresentation, this reform would not lead to<br />
wholesale fraud by allowing proposers to provide intentionally misleading information, or ignore<br />
questions, or supply fragmentary answers to questions, in proposal forms.<br />
31<br />
32<br />
33<br />
34<br />
35<br />
Para 16-032.<br />
Report No. 20, <strong>Insurance</strong> <strong>Contracts</strong> para 184, implemented via section 21(3) of the 1984 Act for non<br />
disclosure and section 27 for misrepresentation.<br />
Ibid.<br />
2007 Consultation Paper, para. 4.44.<br />
Eg Case Study 49 in the Digest.<br />
96
(8) Spent Convictions<br />
4.25 In the 2007 Report on Spent Convictions, 36 the <strong>Commission</strong> considered the general question of<br />
whether Irish law should contain provisions permitting a convicted person to lawfully refuse to disclose<br />
past convictions. The <strong>Commission</strong> noted that the debate ―begins with an acknowledgment that a criminal<br />
record is not necessarily a good predictor of an individuals current or future behaviour.‖ The Spent<br />
Convictions Report recommends, and s.4(2) of the Draft Spent Convictions Bill 2007 contained in the<br />
Report provides, that a rehabilitated person who is asked questions in relation to previous convictions<br />
may treat that question as not relating to a spent conviction; nor is the rehabilitated person to be<br />
prejudiced by failure to disclose or acknowledge that conviction. The draft Spent Convictions Bill directs<br />
that a conviction is spent if, following custodial sentence for a term not exceeding six months, seven<br />
years have elapsed from the date of conviction, the period is five years following the conviction or when<br />
the order ceases to have effect, whichever is the earlier. Questions put to a person are not to be<br />
regarded as disclosure of spent convictions, save where the conviction relates to a conviction for fraud,<br />
deceit or an offence of dishonesty in relation to an offence of dishonesty in relation to an insurance claim<br />
and the fact in question is not excused form disclosure on any insurance proposal form. Subject to<br />
limiting provisions section 4(4) of the Bill provides that ―an obligation imposed on any person by any rule<br />
of law…shall not extend to requiring him or her to disclose a spent conviction or any circumstances<br />
ancillary to a spent conviction‖ (as defined). The Bill provides exceptions in the form of excluded<br />
sentences and for disclosure to be made in respect of excluded employment, as therein defined. The<br />
focus of these legislative initiatives is quite properly upon the rehabilitation of offenders, and the<br />
<strong>Commission</strong> has concluded that it is appropriate to consider spent convictions with a view to providing a<br />
proportionate but focused response to the ―moral hazard‖ concerns of insurers. In this respect, the<br />
Commisison notes that the Government Legislation Programme, Autumn Session 2011, proposes to<br />
publish a Spent Convictions Bill in 2012.<br />
4.26 The <strong>Commission</strong> invites submissions as to whether the existing duty of disclosure and/or rules<br />
on misrepresentation, intended by insurers to identify the moral hazard that an underwriter may be facing,<br />
need to be reconsidered; and in particular, in relation to convicted persons, whether there are<br />
circumstances where a conviction (other than for insurance fraud) should be exempt from the duty to<br />
disclose or the duty to answer questions carefully and truthfully.<br />
C<br />
Misrepresentation – rescission as the primary remedy<br />
4.27 The law of contract, in historical terms, does not have any controlling influence on the<br />
consequences that follow on from the provision of false or misleading information prior to a contract being<br />
concluded. Until relatively recently oral statements made during negotiations were not freely incorporated<br />
into a contractual relationship. 37 The law of tort and principles of equitable relief tended to fill the void,<br />
with equity providing a misrepresentee with the somewhat draconian remedy of rescission of the contract,<br />
ie the right to withdraw from the transaction in certain circumstances. 38 This right was available in equity<br />
even if the misrepresentation was made innocently, that is without fraud or was not carelessly given. One<br />
of the purposes behind the UK Misrepresentation Act 1967, 39 which is broadly comparable to Part V of the<br />
Sale of Goods and Supply of Services Act 1980, was to curtail rescission by giving a court a discretion to<br />
award damages in lieu of rescission. While in theory these provisions apply to insurance contracts, the<br />
effect of the Marine <strong>Insurance</strong> Act 1906 has been much more influential as the 1906 Act creates a parallel<br />
right of avoidance, rather than termination, to an insurer for a proposer‘s misrepresentations.<br />
36<br />
37<br />
38<br />
39<br />
Case Study 22 of 2000.<br />
Report on Spent Convictions, para 1.29.<br />
Eg: Bank of Ireland v Smith [1966] IR 161; Carey v Independent Newspapers [2003] IEHC 67.<br />
For England and Wales. For Northern Ireland see the Misrepresentation Act (Northern Ireland) 1967. Section<br />
3 of both 1967 Acts was replaced by s.8(1) of the Unfair Contract Terms Act 1977.<br />
97
(1) Marine <strong>Insurance</strong> Act 1906 and misrepresentation<br />
4.28 The provisions of s.20(1) of the Marine <strong>Insurance</strong> Act 1906 set out in very stark terms the onus<br />
that rests upon a proposer who makes statements of material facts, expectation or belief, and the<br />
subsection also prescribes a very sweeping remedy for the insurer where the duty is not met.<br />
―Every material representation made by the assured or his agent to the insurer during the<br />
negotiations for the contract, and before the contract is concluded, must be true. If it be untrue<br />
the insurer may avoid the contract.‖<br />
4.29 Section 20(3) provides that a representation may relate to a matter of fact, expectation or<br />
belief, while s.20(5) softens the force of the absolute duty to make statements that are true by providing<br />
that representations relating to expectation or belief are true if made in good faith.<br />
4.30 The decision of Clarke J in Coleman v New Ireland Assurance plc 40 provides a graphic<br />
illustration of this good faith situation. Here, the proposer seeking critical illness cover as part of<br />
mortgage protection insurance answered questions relating to her medical history incorrectly. In<br />
particular she did not indicate that she had seen a specialist some eight years previously in connection<br />
with difficulties with her vision. Neither the specialist or her GP told here she was highly likely to develop<br />
MS. The insurer sought to avoid the policy, inter alia, on the ground that the answers given were untrue.<br />
Clarke J held that the policy could not be avoided on the grounds of misrepresentation because the<br />
proposal form required the proposer to answer questions ―to the best of [her] knowledge‖. While it was<br />
not necessary for Clarke J to refer to s.20(5), this decision is noteworthy because it is another case in<br />
which the Irish judiciary have sought to limit an insurer‘s right to avoid a policy for innocent<br />
misrepresentation. After citing McCarthy J in Keating v New Ireland Assurance, Clarke J indicated that<br />
Irish law does not permit a policy to be avoided where an incorrect answer is given by an honest proposer<br />
because he or she has simply forgotten events or completely put an incident that took place some years<br />
previously out of her mind. Clarke J stated:<br />
―insofar as the answers to questions raised in a proposal form is concerned, a party will only be<br />
exposed to the risk of the contract of insurance being voided where the party fails to answer<br />
such questions to the best of the party‟s ability and truthfully. This would be so even where an<br />
answer is inaccurate as a result of ignorance or even, in the words of McCarthy J., the<br />
―obtuseness which may be sometimes due to a mental block on matters affecting ones<br />
health‖.‖<br />
4.31 This comes very close to holding that rescission for an innocent [mis]representation is no<br />
longer available to an insurer under Irish law. 41 The weight of authority is the other way in cases where<br />
section 20(5), statements of opinion or belief, are not concerned. Lord Hobhouse in HIH Casualty and<br />
General <strong>Insurance</strong> Ltd v Chase Manhattan Bank Casualty and General <strong>Insurance</strong> Ltd v Chase Manhattan<br />
Bank 42 said:<br />
―If a material misrepresentation is untrue even though made in good faith, the insurer may<br />
avoid the contract: s.20. This duty is, like the disclosure duty, strict. It does not depend on<br />
dishonesty, negligence or fraud though it may arise from such a fault. Fault will only become<br />
relevant if some other remedy than avoidance is being sought by the insurers such as<br />
damages or denial of the restitutionary obligations to repay the premium: s.84‖ 43<br />
4.32 The duty to make statements that are true can apply to a variety of circumstances. The<br />
statement might be made voluntarily by the proposer without prompting by the insurer; it might be the<br />
subject of a verbal question (eg an over the telephone question in which the proposer may be given little<br />
or no time to reflect on and give the proper answer), or it may be the subject of a specific written question<br />
40<br />
41<br />
42<br />
43<br />
[2009] IEHC 27.<br />
On rescission in equity/avoidance for material misrepresentation and non disclosure see London Assurance v<br />
Mansel (1879) 11 Ch 363.<br />
[2003] 1 All ER (Comm) 349.<br />
Ibid, at p.375.<br />
98
on a proposal form or in a ‗tick box‘ user interface on a website. The duty is to provide ‗true‘ answers;<br />
whatever a true answer is may depend on specific circumstances. The duty is not to answer questions<br />
honestly and carefully. The duty does not afford an innocent belief that the answer given to a factual<br />
question is honestly held any weight. Even should the proposer have a reasonable belief in the veracity<br />
of his or her statements, the duty will be broken nevertheless. The <strong>Commission</strong> considers that this<br />
requires too much of the consumer and ―small business‖ proposer seeking standard, mass cover<br />
insurance.<br />
4.33 Section 20(1) also prescribes one remedy for breach: Should the misrepresentation be made,<br />
absent the decision of the insurer to waive the breach, the insurer may rescind or avoid the contract. The<br />
breach of s.20(1) resembles a breach of a condition in the Sale of Goods Act 1893 sense; breach of<br />
s.20(1) does not give a right to damages only (ie it is not to be treated as a term analogous to a warranty<br />
under the 1893 Act). Nor does s.20(1) countenance the possibility of the obligation being classified as an<br />
innominate term, leaving the remedy to be tailored by reference to the consequences of breach. 44 The<br />
failure of the 1906 Act to provide proportionate remedies for misrepresentation is due to the fact that for<br />
wholly innocent misrepresentations, unless some intervening factor is present (third party rights, etc),<br />
equitable rescission was the primary remedy. In the context of insurance the effect of this rather blunt<br />
remedial mechanism can be striking. The contract can be rescinded at any time after the<br />
misrepresentation was made, particularly so in cases where the risk has already materialised. Where the<br />
insurer elects to rescind, s.84(3)(a) of the 1906 Act entitles the proposer to the return of premiums, save<br />
where fraud or illegality by the insured is present, in which case the premiums are forfeit.<br />
4.34 The <strong>Commission</strong> provisionally recommends that section 20 of the Marine <strong>Insurance</strong> Act 1906<br />
should be repealed in relation to consumer insurance and mass market insurance products (including<br />
mass market insurance products to all businesses, not limited to the jurisdictional limit of the Financial<br />
Services Ombudsman); and that the duty in section 20 of the 1906 Act to furnish “true” answers should be<br />
replaced by a duty to answer specific questions honestly and carefully.<br />
(2) Limited reforms in Sale of Goods and Supply of Services Act 1980<br />
4.35 Limited efforts to inject some flexibility into the law relating to remedies following upon a<br />
misrepresentation have been attempted in England and Wales, Ireland, Hong Kong, Singapore and some<br />
Australian States via statutory provisions that find their origins in England and Wales in the form of the<br />
Misrepresentation Act 1967. 45 Section 2(1) affords a misrepresentee with a statutory cause of action in<br />
damages following upon an innocent (ie non-fraudulent) misrepresentation, while section 2(2) gives a<br />
court a discretion to award damages in lieu of rescission. These provisions are replicated in this State by<br />
section 45(1) and (2) of the Sale of Goods and Supply of Services Act 1980 respectively. Because a<br />
contract of insurance is a contract for services and thus within section 43, it is possible for the Irish<br />
judiciary to abridge an insurer‘s rights of rescission accordingly. There is a technical difficulty of course<br />
because the 1906 Act speaks of ―avoidance‖ not ―rescission‖. However, there are apparently no cases<br />
from across the common law world in which these provisions exist in which a court has applied them in<br />
the context of an insurance contract. Indeed, the two <strong>Law</strong> <strong>Commission</strong>s in the 2007 Consultation Paper<br />
note judicial hostility exists to the use of such powers in the context of commercial insurance. 46 While this<br />
may be understandable in the context of large risk insurance or reinsurance, the failure of counsel or the<br />
judiciary to invoke these provisions in consumer and standard form business insurance disputes is<br />
puzzling.<br />
44<br />
45<br />
46<br />
While judicial attitudes have differed, the general view is against holding questions asked in proposal forms to<br />
be innominate terms, for generally sould policy reasons. See Chapter 10: Remedies.<br />
For England and Wales. For Northern Ireland see the Misrepresentation Act (Northern Ireland) 1967. Section<br />
3 of both 1967 Acts was replaced by s.8(1) of the Unfair Contract Terms Act 1977.<br />
Misrepresentation, Non-Disclosure and Breach of Warranty by the Insured (July 2007) page 25.<br />
99
(3) Should the right to rescind be lost in cases where the proposer makes a negligent<br />
misrepresentation?<br />
4.36 Should a misrepresentee‘s right to rescind for a negligent misrepresentation be abridged? The<br />
approach initially adopted in the 2007 <strong>Law</strong> <strong>Commission</strong>‘s Consultation Paper is very much along the lines<br />
of that adopted in Australia in the 1984 Act. The decision was taken in Australia to confine the insurer‘s<br />
right to avoid the contract for non-disclosure and/or misrepresentation to cases of fraudulent nondisclosure<br />
or fraudulent misrepresentation. In the ALRC Report this position was defended on the ground<br />
that avoidance or rescission of an insurance contract results in disproportionate consequences:<br />
―The remedy or avoidance of rescission of a contract is not unique to insurance. But there is a<br />
vital difference between the operation of that remedy in insurance and its operation in relation<br />
to other contracts. Avoidance of a contract for, say, the sale of land does not usually result in<br />
great hardship to either party. The vendor regains his interest in the land; the purchaser<br />
recovers his money. But avoidance of an insurance contract normally takes place after a loss<br />
has occurred and a claim has been made. In such a case, it inevitably results in a loss which<br />
may well be overwhelming. The principle of restitutio in integrum is satisfied only in the most<br />
technical sense. The insured gets back his premium and the insurer is freed from its<br />
obligations. But that does not put the parties back into the substantial position they were in at<br />
the time of the contract; at that time, the insured had not suffered an uninsured loss. In many<br />
cases, the insurer‘s remedy is out of all proportion to the harm caused by the insured‘s breach<br />
of duty. These considerations suggest that a limitation should be placed upon an insurer‘s<br />
right to avoid a contract for a non-disclosure or misrepresentation. The limitation which<br />
suggests itself is the substitution of a right to damages for the existing right of avoidance. That<br />
would provide an adequate deterrent to misrepresentation and non-disclosure. It would also<br />
ensure that insurers were entitled to adequate compensation for loss suffered as a result of<br />
breach of the insured‘s duties. Disproportionate burdens would no longer be placed on the<br />
insured‖ 47<br />
4.37 The <strong>Law</strong> <strong>Commission</strong>s did not however go so far as to adopt this 1982 Australian<br />
recommendation: in business insurance for example the rules set out in the 2007 Consultation Paper<br />
were proposed as default rules, and at paragraph 5.110 of the Consultation Paper the view was<br />
expressed to be that, subject to a requirement to be transparent in concluding business to business<br />
insurance, the contracting parties would be free ―to agree that the insurer would have specified remedies<br />
for misrepresentation, which may apply, even if the proposer was honest and careful in giving<br />
information‖: a fortiori such remedies would be available in cases of negligence on the part of the<br />
proposer. It cannot of course be known how UK law will ultimately be reformed on this question because<br />
the 2009 Report and the Consumer <strong>Insurance</strong> (Disclosure and Representation) Bill 2011 do not address<br />
business insurance generally. Contracting out of the restrictions on rescission as a stipulated remedy in<br />
consumer insurance is not permissible under the 2011 Bill, but it must be likely that the United Kingdom<br />
will continue with some level of contracting out/freedom of contract in business insurance generally.<br />
4.38 The issue thus arises as to whether the duty of disclosure should be recast so that a proposer<br />
is bound to answer specific questions honestly and carefully and disclose facts that are actually known to<br />
him to be either highly relevant to a reasonable insured or facts which, in circumstances, a reasonable<br />
insured would know to have a decisive influence on the insurer‘s decision in acceoting the risk or setting<br />
the premium. Meeting such a duty should still require the proposer to comply with the general law of tort:<br />
the duty not to misrepresent facts fraudulently or make negligent misstatements will generally provide the<br />
misrepresentee with the right to rescind any contract resulting therefrom, and at first blush it is difficult to<br />
see why a falsity uttered negligently or fraudulently in relation to an insurance contract aimed at<br />
consumers and businesses via mass market sales mechanisms should be treated differently.<br />
4.39 The reasoning of the ALRC – that the consequences are disproportionate – is persuasive, but<br />
it can be argued that loss of the right to rescind may itself be disproportionate, seen from the perspective<br />
47<br />
ALRC Report No. 20, <strong>Insurance</strong> <strong>Contracts</strong>, para 187.<br />
100
of the insurer. 48 Furthermore, where the proposer has made a negligent misstatement or negligent<br />
misrepresentation, the proposer will in all likelihood have failed to observe his or her duty to answer<br />
questions carefully and accurately.<br />
4.40 The view that a proposer who has been negligent should be nevertheless able to enforce the<br />
contract, notwithstanding this breach of duty, has been rejected by one of the most distinguished English<br />
judges of recent years. In Highlands <strong>Insurance</strong> v Continental <strong>Insurance</strong> 49 Steyn J was dealing with a fire<br />
reinsurance contract that had been struck on the basis that the premises in question were fitted with<br />
sprinklers (which was not the case). The insured sought to rely on s.2(2) of the Misrepresentation Act<br />
1967 (the Irish counterpart to which is s.45(2) of the Sale of Goods and Supply and Services Act 1980).<br />
Steyn J refused to exercise his discretion to declare the policy to be subsisting and award damages in<br />
lieu of rescission. This statutory discretion is a notoriously difficult one to persuade a court to exercise<br />
and, in this context, one may be forgiven for thinking that the difficulty of conducting a damages<br />
assessment exercise may itself have led Steyn J to decide rescission was the least inappropriate remedy.<br />
Steyn J explained that he would not use s.2(2) in this case because:<br />
―Where a contract of reinsurance has been validly avoided on the grounds of material<br />
misrepresentation, it is difficult to conceive of circumstances in which it would be equitable<br />
within the reasoning of s.2(2) to grant relief from such avoidance. Avoidance is the appropriate<br />
remedy for material misrepresentation in relation to marine and non-marine contracts of<br />
insurance. See Arnould, <strong>Law</strong> of Marine <strong>Insurance</strong> and Average, 16th edition, Vol. 2 p.62. The<br />
rules governing material misrepresentation fulfil an important ‗policing‘ junction in ensuring that<br />
the brokers make a fair representation to underwriters. If s.2(2) were to be regarded as<br />
conferring a discretion to grant relief from avoidance on the grounds of material<br />
misrepresentation to the efficacy of those rules will be eroded. This policy consideration must<br />
militate against granting relief under s.2(2) from an avoidance on the grounds of material<br />
misrepresentation in the case of commercial contracts of insurance.‖ 50<br />
4.41 The facts of the Highlands <strong>Insurance</strong> case are clearly distinguishable from most other<br />
insurance contracts. The reference to commercial insurance is arguably broader than was necessary,<br />
this being a case involving business property insurance. The dispute related to a reinsurance contract<br />
and included the usual broker to underwriter situation. Notwithstanding these criticisms of the scope of<br />
Steyn J‘s dictum, the reference to ―avoidance‖ being ―the appropriate remedy for material<br />
misrepresentation‖ for all contracts of insurance is one which suggests that s.2(2) is unlikely to be used<br />
48<br />
49<br />
50<br />
Note that under the PEICL proposals, Article 2:102(3), the insurer may terminate the contract even if the<br />
proposer is innocent (ie non-fraudulent) if the insurer can show the contract would not have been concluded if<br />
the true facts had been known. Reiecke, ―Remedies for Misrepresentation Inducing a Long-Term <strong>Insurance</strong><br />
Contract: The Didcott Principle‖ (2009) 21 SA Merc LJ 387, provides support for the argument that the right to<br />
avoid or cancel should depend on the effects of the proposer‘s default. Here the argument was put in a South<br />
African context that an insurer should only be able to cancel a policy on the grounds of misrepresentation or<br />
breach of warranty if it would not have entered the contract. Didcott J in Pillay v The South African Life<br />
Assurance Co. Ltd (1991) 1 SA 363 (D) argued that if the isurer would have entered into a contract but on<br />
different terms those terms should be imposed. Professor Reinecke argues, after citing developments<br />
elsewhere (p.395) that ―it is to be hoped that the industry will listen to the voice of reason coming from all over<br />
the world. If local perceptions on this topic could be brought into line with modern thinking, it would ease the<br />
way towards reform through legislation or otherwise. The insurance industry sells security. The adoption of the<br />
Didcott principle will boost the public‘s trust in insurance. Not only will insured persons benefit from the<br />
enhanced security provided by their policies, but in the long run this will also lead to an increase in the<br />
volumes of insurance business!‖<br />
[1987] 1 Lloyd‘s Rep 109.<br />
Ibid at p.118.<br />
101
y English judges to any extent, and the <strong>Law</strong> <strong>Commission</strong>s in their Consultation Paper comment that<br />
there are no cases in which s.2(2) has been applied to an insurance contract. 51<br />
4.42 Steyn J defended his refusal to apply s.2(2) on the basis that to do so would undermine the<br />
‗policing‘ function inherent in the law of misrepresentation. Clearly there is much force in this where the<br />
misrepresentation has been made fraudulently and even negligently. It has no applicability in relation to<br />
the innocent misrepresentation made without fault. Nevertheless, there is the possibility of retaining the<br />
insurer‘s right to avoid a policy on the basis that the proposer has made a negligent misstatement or<br />
negligent misrepresentation, while at the same time tempering the disproportionate effect of the<br />
rescission remedy, by providing that financial adjustments or damages are to be the primary relief<br />
following a negligent misstatement or a negligent misrepresentation: rescission would be reserved to<br />
extreme ‗policing‘ situations. One possible approach would be to turn to section 45(2) of the Sale of<br />
Goods and Supply of Services Act 1980, the counterpart to the English statutory provision considered in<br />
Highlands <strong>Insurance</strong>. Section 45(2) provides:<br />
―Where a person has entered into a contract after a misrepresentation has been made to him<br />
otherwise than fraudulently and he would be entitled, by reason of the misrepresentation, to<br />
rescind the contract, then, if it is claimed in any proceedings arising out of the contract that the<br />
contract ought to be or has been rescinded, the court may declare the contract subsisting and<br />
award damages in lieu of rescission, if of opinion that it would be equitable to do so, having<br />
regard to the nature of the misrepresentation and the loss that would be caused by it if the<br />
contract were upheld, as well as to the loss that rescission would cause to the other party.‖<br />
4.43 The Northern Ireland decision in Odyssey Cinemas Ltd v Village Theatres Three Ltd 52 provides<br />
a useful illustration of how the court may utilise the discretion. This case concerned a claim by a<br />
commercial tenant to rescind the lease of a cinema based upon misrepresentations concerning noise<br />
emanating from adjoining licensed premises. The lessor‘s solicitors who made the misrepresentation<br />
were held to have done so negligently but not fraudulently or recklessly. In the Northern Ireland High<br />
Court, Deeny J turned the subsection on its head when holding that it would be inequitable not to award<br />
damages in lieu of rescission. No bona fide effort was made by the lessee to deal with the noise problem,<br />
characterised by Deeny J as ―not an inherent and irreparable defect in the premises.‖ The lessor was a<br />
mark for damages – indeed the lessor was owed rent by the lessee. Rescission if granted would have<br />
disproportionate consequences. In essence the lessee was seeking to use a misrepresentation relating<br />
to a minor problem as the basis for resiling from what turned out to be a bad bargain. On appeal, the<br />
Northern Ireland Court of Appeal considered rthat Denny J had erred in concluding that damages would<br />
be reduced by contributory negligence, as such, under the 1967 Act. Nonetheless, the Court also<br />
accepted that this was one of the factors that could be tgaken into account in determining whether<br />
rescission or damages was the appropriate remedy. Indeed, the Court considered that this reinforced<br />
Denny J‘s view that damages rather than rescission sould be more suitable; and rtemitted the case to him<br />
on this basis.<br />
4.44 It might be possible to build upon section 45(2) by providing the judge or the Ombudsman with<br />
a number of indicative factors that could be reference points when the section 45(2) discretion arises in<br />
the context of insurance contracts dispute resolution. These factors could include:<br />
the factual context in which the misrepresentation was made<br />
the practicality of providing the insurer with an alternative remedy in damages<br />
the availability of a remedy to the proposer against a third party such as an insurance broker<br />
the relevant insurance sector and the reaction within it had no misrepresentation been made (ie<br />
would the proposal have been declined, loaded etc.)<br />
51<br />
52<br />
July 2007, page 25. Indeed, Clause 4, specifically Clause 4(3) of the Consumer <strong>Insurance</strong> (Disclosure and<br />
Representations)Bill 2011 stipulates that for careless misrepresentations the sole remedies for<br />
misrepresentation are found in the schedule to the Bill, apparently making resort to section 2 of the 1967 Act<br />
impossible.<br />
[2010] NICh 1, [2010] NICA 25.<br />
102
the commercial experience of the proposer and his/her familiarity with the relevant insurance<br />
sector<br />
the need to ensure that the remedy given takes account of and is consistent with any proposed<br />
reliefs that may be available in relation to any breach by the proposer of the duty of disclosure.<br />
4.45 While this solution is less radical than the Australian approach, it has the merit of taking<br />
account of existing Irish statutory provisions that the Oireachtas has already sanctioned in relation to<br />
curbing the availability of rescission as a primary remedy for pre-contractual misrepresentation. This<br />
approach also leaves it open for the judge or ombudsman to decide, on a case by case basis, that even<br />
though the proposer may not have been fraudulent, the degree of negligence demonstrated in the instant<br />
situation is one whereby the ‗policing‘ function, and the link between misrepresentation and breach of the<br />
duty of disclosure, makes avoidance or rescission an appropriate remedy. The <strong>Commission</strong> does not<br />
anticipate that this decision to continue to afford the insurer the right to rescind for a purely negligent<br />
misrepresentation will be made readily or frequently. It may be that cases will arise whereby the<br />
alternative financial remedy will be impossible to calculate with any ease, but the judge or ombudsman<br />
should be able to resort to rescission as an appropriate remedy in exceptional circumstances.<br />
4.46 The <strong>Commission</strong> invites submissions as to whether Part V of the Sale of Goods and Supply of<br />
Services Act 1980, which concerns misrepresentation, should be tailored to insurance contracts so as to<br />
provide a remedy in damages in place of rescission in respect of pre-contractual misrepresentations<br />
made by the proposer and the failure to observe the proposed duty of disclosure in insurance law.<br />
4.47 The <strong>Commission</strong> does not however favour the solution initially canvassed by the Joint<br />
Consultation Paper by the two British <strong>Law</strong> <strong>Commission</strong>s. The <strong>Commission</strong> has already rejected the<br />
dichotomy drawn between misrepresentation in consumer insurance and business insurance. In the view<br />
of the <strong>Commission</strong> the decision to confine the business insurance reforms to situations where the<br />
business insured and the insurer have not contracted out is an open invitation to insurers to write around<br />
the default rules. As the default rules, as recast, broadly reflect general principles of contract law and tort<br />
law the <strong>Commission</strong> find this approach puzzling and over-elaborate. The <strong>Commission</strong> favours mandatory<br />
rules that operate in a more horizontal manner, giving the parties the kind of outcome that would have<br />
resulted had the breach of duty not occurred.<br />
(4) Fraudulent Misrepresentation<br />
4.48 In the leading English case of Derry v Peek 53 the House of Lords, particularly Lord Herschell,<br />
summarised the elements of actionable fraudulent misrepresentation as requiring any person alleging<br />
deceit to show that ―a false representation has been made (1) knowingly, or (2) without belief if its truth, or<br />
(3) recklessly, careless whether it be true or false‖. 54 MacGillivray has summarised the position within<br />
insurance law thus:<br />
―In order to constitute an actionable fraudulent misrepresentation the statement of which<br />
complaint is made must be:<br />
(1) false,<br />
(2) made dishonestly, and<br />
(3) acted upon by the recipient in the sense that it induced him to make the proposed<br />
contract. 55<br />
4.49 Corrigan and Campbell provide a succinct analysis of fraud in Irish insurance law and practice.<br />
Fraud is relevant:<br />
―at the inception of the policy where material facts have been deliberately withheld or a true<br />
state of affairs misrepresented. This has given rise to very few reported cases. Seldom have<br />
there been circumstances where the insurer could not simply rely on the defence of innocent<br />
53<br />
54<br />
55<br />
(1889) 14 App Cas 337.<br />
Ibid, p.374.<br />
Paragraph 16-001.<br />
103
non-disclosure or misrepresentation to defeat a claim successfully, rather than raise the<br />
seemingly more complicated issue of fraud. Those cases that to exist have arisen in the<br />
claims context and are all of very recent origin. Historically Irish insurers have relied on indirect<br />
and unrelated defences to avoid paying what they believed to be a fraudulent claim. With<br />
many of these defences no longer available, insurers nofaced by what they believe to be a<br />
fraudulent claim are forced to confront head-on the issue of fraud. 56<br />
4.50 Both Lord Hershell‘s speech and the extract from MacGillivray were applied in McAleenan v<br />
AIG (Europe) Ltd. 57 The plaintiff was employed as a solicitor in the practice of Michael Lynn & Co. Mr<br />
Lynn was the principal and in preparing an application for professional indemnity cover Mr Lynn stated on<br />
the proposal form that the plaintiff was a partner in the firm. After holding that this was both untrue and a<br />
material misstatement, Finlay Geoghegan J went on to consider whether the misstatement was fraudulent<br />
in the light of two further findings, (1) that the plaintiff did not know of Mr Lynn‘s misstatement, (2) she<br />
signed the form on behalf of the practice, in Mr Lynn‘s absence from his office. Finlay Geoghegan J<br />
continued:<br />
―Neither of the above findings precluded a finding of fraud in the making of the false statement<br />
if the untrue statement was made ―recklessly‖, in the sense that the term was used in Derry v<br />
Peek, ie careless as to whether the statement be true of false. It is clear that ―careless‖ for this<br />
purpose is not the same as when used in relation to the tort of negligence. The carelessness<br />
must be something greater, if it is to constitute recklessness for the purposes of fraud. As<br />
pointed out by Lord Herschell, in the extract from his speech referred to above, a statement<br />
may be considered as made recklessly where the circumstances are such that the Court<br />
considers that the maker can have no real belief in the truth of what he states. It appears to<br />
require an objective consideration by the Court as to whether the circumstances in which the<br />
plaintiff signed the Proposal Form (and, by doing so, made the representations or statements<br />
contained therein) were so careless as to whether the statements were true or false that the<br />
Court must conclude that she could have had no real belief in the truth of the statements<br />
contained in the Proposal Form….On her own evidence, notwithstanding that the Form, when<br />
presented to her for signature, had been completed, she did not read the answers given in<br />
relation to her status in the practice and was unaware of the type of person by whom the Form<br />
was required to be completed and signed, notwithstanding the express statement at the start of<br />
the Form and the description immediately under which she signed. As already stated her<br />
actions must be considered in the context of the obligations of ‗utmost good faith‘ in relation to<br />
the completion of a proposal form for insurance of which she was or ought to have been aware.<br />
Considering the matter from the plaintiff‘s potential belief in the truth of the statements made in<br />
the competed Proposal Form, as on her own evidence, she was unaware of what statements<br />
she was making by signing the Form, - and was unaware of the person expressly required to<br />
sign the Form. It is not possible for me to conclude that she had any belief in the truth of the<br />
statements made.‖ 58<br />
4.51 Irish case-law on fraudulent misrepresentation does not suggest that the law contains any<br />
critical problems generally. The question whether fraud raises any particular difficulties in terms of<br />
consumer confusion in particular was considered by the <strong>Law</strong> <strong>Commission</strong>s in the 2007 Joint Consultation<br />
Paper and again in the 2009 Report and Draft Bill. The proposals on avoidance for fraud generally follow<br />
common law patterns. Indeed, while the Consumer <strong>Insurance</strong> (Disclosure and Representations) Bill 2011<br />
56<br />
57<br />
58<br />
Corrigan & Campbell, A Casebook of Irish <strong>Insurance</strong> <strong>Law</strong> (Oak Tree Press 1994) at 322<br />
[2010] IEHC 128. See also Goldsmith Williams v Travellers <strong>Insurance</strong> [2010] Lloyd‘s <strong>Law</strong> Reports IR 309.<br />
[2010] IEHC 128, at paras 123-4. Contrast Odyssey Cinemas Ltd v Village Theatres Three Ltd [2010] NICh 1,<br />
[2010] NICA 25, above, on the negligence/recklessness boundary. Furay v Eagle Star and British Dominions<br />
<strong>Insurance</strong> (1922) 56 ILTR 23, 109.<br />
104
currently before the UK Parliament, in the definition of ―qualifying‖ misrepresentations, uses ―deliberate or<br />
reckless‖ and ―careless‖, rather that fraud or negligence, no changes of substance are evident. 59<br />
4.52 Similarly, the Australian <strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong> saw no need to review the law relating to<br />
fraudulent misrepresentation although the ALRC recommended modification of the avoidance remedy. 60<br />
4.53 There are however two issues that are of concern within the context of actionable fraudulent<br />
misrepresentation. One of them may be classified as being a need ―for the avoidance of doubt‖<br />
declaration in relation to materiality.<br />
4.54 In Pan Atlantic <strong>Insurance</strong> Co v Pine Top <strong>Insurance</strong> Co 61 Lord Mustill observed that a<br />
representation inducing a contract which was fraudulent would ―invariably give a right to avoid‖ 62 without<br />
materiality being a necessary element for the insurer to establish. Both MacGillivray and the authors of<br />
Good Faith and <strong>Insurance</strong> <strong>Contracts</strong> 63 are of the view that this argument is wrong.<br />
4.55 The second issue arises out of the deliberations of the <strong>Law</strong> <strong>Commission</strong>s in both the Joint<br />
Consultation Paper and the December 2009 Report. In cases where fraudulent misrepresentation is<br />
alleged by an insurer, against a proposer the onus of proof will be upon the insurer but the <strong>Law</strong><br />
<strong>Commission</strong>s suggested that two presumptions might be of assistance to the insurer. These are that the<br />
[consumer insured] knew:<br />
―(1) What someone in their position would normally be expected to know; and<br />
(2) that where the insurer asked a clear question, the issue was relevant to the insurer.‖ 64<br />
4.56 The <strong>Law</strong> <strong>Commission</strong>s point out that these presumptions are rebuttable (eg in the first situation<br />
the proposer did not know he had suffered a heart attack). These presumptions have found their way into<br />
Clause 5(5) of the Consumer <strong>Insurance</strong> and Representations) Bill 2011.<br />
4.57 On the issue whether the definition of fraud should be put on a legislative basis, the<br />
<strong>Commission</strong> has concluded that the common law should be retained in its present state and does not<br />
consider that any change be made on this point.<br />
(5) Misrepresentation – the <strong>Insurance</strong> Ombudsman of Ireland Decisions<br />
4.58 The decisions of the <strong>Insurance</strong> Ombudsman in the pre 2005 period indentify many instances<br />
where non disclosure involves factual misstatements that, on the bare facts, look like instances of<br />
fraudulent misrepresentation because of the specific nature of the questions asked by the insurer. For<br />
obvious reasons the <strong>Insurance</strong> Ombudsman hesitated to reach conclusions on fraud: there are similar<br />
judicial decisions where fraud is not in issue. 65<br />
4.59 The <strong>Insurance</strong> Ombudsman found misrepresentations were made in the following instances:<br />
Factually incorrect answers about medical history in life assurance 66<br />
59<br />
60<br />
61<br />
62<br />
63<br />
64<br />
65<br />
66<br />
Joint Consultation Paper, para 12.9. Para 4.50 appears to eschew the common law rules on recklessness. In<br />
the 2009 Report the <strong>Law</strong> <strong>Commission</strong>s adopt the ABI definition: para 6.27.<br />
ALRC Report No. 20, para 196: <strong>Insurance</strong> <strong>Contracts</strong> Act 1984, s.31 provides a judicial discretion to disallow<br />
avoidance where the consequences are disproportionate. The <strong>Commission</strong> does not favour the introduction<br />
of such a discretion as being likely to weaken the deterrent function of the duty to answer specific questions<br />
carefully.<br />
[1994] All ER 581.<br />
Ibid at 602.<br />
See MacGillivray, para 16-001, footnote 1.<br />
2009 Report, paras 6.34-6.39.<br />
Griffin v Royal Liver (1942) 76 ILTR; Curran v Norwich Union [1987] IEHC 5.<br />
Case Study 15 of 2000; Case Study 14 of 2003.<br />
105
Factually incorrect answers to a question about whether the proposer has any criminal<br />
convictions for motoring offences 67<br />
Incomplete statement of previous claims history 68<br />
4.60 However, as in cases of non disclosure, the fact that a misrepresentation has been made does<br />
not per se allow repudiation or avoidance of the policy. The facts of several of the case studies suggest<br />
that the proposer made misrepresentations but the cases were treated as non disclosure cases.<br />
Avoidance was declined where a proportionate remedy was possible, especially if there was an innocent<br />
misrepresentation offset by poor information gathering by the insurer. 69<br />
(6) Developments in the United Kingdom on misrepresentation<br />
4.61 Although the Misrepresentation Act 1967 sought to limit the availability of rescission for a non<br />
fraudulent misrepresentation, the Act has had no visible impact upon the law of insurance in the United<br />
Kingdom. 70<br />
4.62 As the <strong>Commission</strong> has shown, the review of insurance contract law undertaken by the <strong>Law</strong><br />
<strong>Commission</strong> of England and Wales between 1979 and 1980 came to nothing in terms of a legislative<br />
result. The most recent analysis undertaken by the <strong>Law</strong> <strong>Commission</strong>s as a joint project has produced a<br />
joint Consultation Paper, 71 a Report 72 and a Bill 73 which was introduced into Parliament on May 16, 2011.<br />
The proposals have remained generally consistent, borrowing from the work undertaken in 1979-1980,<br />
the Australian 1984 Act and taking account of industry practice and FOS rulings.<br />
4.63 The <strong>Law</strong> <strong>Commission</strong>s approached the question of how best to reform the duty of disclosure<br />
and misrepresentation by classifying both issues as involving the gathering of pre contractual information<br />
from the insured. The <strong>Commission</strong>s then went on to provide for separate treatment in respect of<br />
consumer insureds and business insureds. In essence, the <strong>Commission</strong>s recommended that where a<br />
consumer makes a misrepresentation that induces the insurer to enter into the contract, the remedies<br />
available to the insurer should largely depend on the mental state of the proposer.<br />
4.64 In the Consultation Paper it was recommended that an insurer should be entitled to avoid the<br />
policy if the consumer has made a deliberate or reckless misrepresentation which the consumer<br />
(i) knows to be untrue (or knows it may be untrue or is made not caring whether or<br />
not it is true) and, the consumer<br />
(ii) knows the statement to be relevant to the insurer (or knows it may be relevant<br />
and the statement is made not caring whether or not it is relevant).<br />
4.65 The provision in the 2011 Bill on avoidance is in Schedule 1, Part 1, and stipulates that if a<br />
qualifying representation was deliberate or reckless the insurer ―may avoid the contract and refuse all<br />
claims‖ and need not return premiums save where to do so would be unfair to the consumer. Clauses<br />
5(2)-(5) provides a useful summary of judicial decisions that serve to distinguish cases of fraud from<br />
negligence. The use of the phrases ―deliberate or reckless‖ (rather than fraud) and carelessness (rather<br />
67<br />
68<br />
69<br />
70<br />
71<br />
72<br />
73<br />
Case Study 13 of 2001.<br />
Case Study 154 of 1992-1998.<br />
Cases 41, 68, 76 and 157 of 1992-1998.<br />
<strong>Insurance</strong> Contract <strong>Law</strong>: Misrepresentation, Non-Disclosure and Breach of Warranty by the Insured (2007)<br />
(Consultation Paper No 182) page 25, footnote 10.<br />
<strong>Insurance</strong> Contract <strong>Law</strong>: Misrepresentation, Non-Disclosure and Breach of Warranty by the Insured (2007)<br />
(Consultation Paper No 182).<br />
Consumer <strong>Insurance</strong> <strong>Law</strong>: Pre-contract Disclosure and Misrepresentation (2009) (<strong>Law</strong> Com No 319/Scot <strong>Law</strong><br />
Com No. 219).<br />
Consumer <strong>Insurance</strong> (Disclosure and Representations) Bill 2011, HC Bill 68.<br />
106
than, for example, negligent misstatement) is, in the view of the <strong>Commission</strong>, helpful. Clause 5 of the<br />
2011 Bill provides, in part:<br />
―(2) A qualifying misrepresentation is deliberate or reckless if the consumer -<br />
(a) knew that it was untrue or misleading, or did not care whether or not it was untrue or<br />
misleading, and<br />
(b) knew that the matter to which the misrepresentation related was relevant to the<br />
insurer, or did not care whether or not it was relevant to the insurer.<br />
(3) A qualifying misrepresentation is careless if it is not deliberate or reckless.<br />
(4) It is for the insurer to show that a qualifying misrepresentation was deliberate or reckless.<br />
(5) But it is to be presumed, unless the contrary is shown –<br />
(a) that the consumer had the knowledge of a reasonable consumer, and<br />
(b) that the consumer know that a matter about which the insurer asked a clear and<br />
specific question was relevant to the insurer."<br />
4.66 In the case of an innocent (ie non fraudulent) misrepresentation, the recasting of the duty of<br />
disclosure to a duty on the consumer to be honest and careful in answering questions or volunteering<br />
information, has, as a consequence, that the insurer should not be entitled to refuse to pay the claim, or<br />
to avoid the policy on the ground that there was a misrepresentation by the consumer. 74 The<br />
<strong>Commission</strong>s also developed the implications of the duty to act carefully, ie reasonably, in relation to<br />
factual matters that the consumer might not think would render the statement inaccurate. Furthermore,<br />
the type of policy, the way in which it was sold and the normal characteristics of consumers who purchase<br />
the policy are to be taken into account, as are the personal characteristics of the actual proposer, insofar<br />
as these were known to the insurer. The <strong>Commission</strong>s also initially recommended that the burden of<br />
showing that the consumer acted unreasonably in making the misrepresentation should be on the insurer.<br />
4.67 This approach was the subject of criticism in some of the responses to the Consultation Paper<br />
but the <strong>Law</strong> <strong>Commission</strong>s‘, in the 2009 Report indicated that some respondents misunderstood the<br />
situation, specifically that insurers only had to show carelessness on the part of a reasonable consumer,<br />
not the actual consumer. Nevertheless there is no burden of proof provision for careless<br />
misrepresentation. In contrast to clause 5(4) (deliberate or reckless misrepresentation) Clause 3 sets out<br />
this ―reasonable care‖ test:<br />
―(1) Whether or not a consumer has taken reasonable care not to make a<br />
misrepresentation is to be determined in the light of all the relevant circumstances.<br />
(2) The following are examples of things which may need to be taken into account in<br />
making a determination under subsection (1)–<br />
(a) the type of consumer insurance contract in question, and its target market,<br />
(b) any relevant explanatory material or publicity produced or authorised by the<br />
insurer,<br />
(c) How clear, and how specific, the insurer‘s questions were,<br />
(d) whether or not an agent was acting for the consumer.<br />
(3) The standard of care required is that of a reasonable consumer: but this is subject to<br />
subsections (4) and (5).<br />
(4) If the insurer was, or ought to have been, aware of any particular characteristics or<br />
circumstances of the actual consumer, those are to be taken into account.<br />
(5) A misrepresentation made dishonestly is always to be taken as showing lack of<br />
reasonable care.‖<br />
74<br />
<strong>Law</strong> Com No. 319/Scot <strong>Law</strong> Com No. 219 (December 2009) para 6.13.<br />
107
4.68 While the English and Scottish <strong>Law</strong> <strong>Commission</strong>s stopped short of recommending that an<br />
insurer should be required to consult databases or the insurers own files, the question whether a<br />
consumer acted with insufficient care in failing to give information should, the <strong>Commission</strong>s said, be<br />
viewed by reference to how reasonable it was for an insurer to obtain information for itself (for example,<br />
by seeking the consumer‘s express consent to a request to a third party for disclosure of information held<br />
by the third party about the consumer). Clause 3(4) seems relevant to this point but does not give any<br />
real guidance to a court.<br />
4.69 In the case of misrepresentations made carelessly, avoidance is not possible but the<br />
<strong>Commission</strong>s recommend a compensatory remedy aimed at putting the insurer in the position it would<br />
have been in if the misrepresentation had not occurred. This could result in a claim not being met or<br />
adjusted, or the application of a financial adjustment based upon proportionality. In making this<br />
recommendation the <strong>Commission</strong>s departed from the earlier <strong>Law</strong> <strong>Commission</strong> Report from 1980 which<br />
saw proportionality as an imprecise or often arbitrary mechanism. Even if this be so, the <strong>Commission</strong>s<br />
argued:<br />
―In any event, in our view it is preferable to allow judges to aim imprecisely at the correct figure<br />
than to apply one that is clearly wrong (as where a policy is avoided altogether when there<br />
would have been only a small increase in the premium). There are many occasions in which<br />
the courts are forced to place arbitrary figures on the level of damages, particularly in personal<br />
injury cases. The level of imprecision involved here would appear to fall within acceptable<br />
limits.‖ 75<br />
4.70 The <strong>Commission</strong> considers the proportionality remedy below in Chapter 10, below. The<br />
Schedule to the 2011 UK Bill provides a detailed account of how the remedy will be utilised.<br />
(7) Innocent misrepresentation<br />
4.71 Where a proposer makes an innocent misrepresentation in the sense that the proposer has<br />
exercised the necessary amount of care in reading questions put to him or her orally, or in the proposal<br />
form, or on an on-line application form, and has answered the question truthfully and with due care and<br />
deliberation, the Commisssion sees no basis for the insurer to be able to argue that the contract of<br />
insurance should be vitiated or avoided on the ground of innocent misrepresentation.<br />
4.72 The <strong>Commission</strong> provisionally recommends that where a proposer has exercised due care and<br />
attention in understanding the questions put and has provided the answers to such questions honestly<br />
and with due care and deliberation, the insurer should not be able to avoid liability on the policy that has<br />
arisen prior to discovery of the innocent misrepresentation.<br />
4.73 However, in situations where the insurer is able to show that, if the true facts were known at<br />
the time when the innocent misrepresentation was made the insurer would not have accepted that risk in<br />
any circumstances, the question arises whether the insurer should be entitled to terminate the policy<br />
prospectively. The <strong>Commission</strong> makes a provisional recommendation on the issue of prospective<br />
avoidance below in Chapter 10.<br />
75<br />
<strong>Law</strong> Com No. 319/Scot <strong>Law</strong> Com No. 219 (December 2009), para 6.66.<br />
108
5<br />
CHAPTER 5<br />
WARRANTIES<br />
A<br />
Introduction<br />
5.01 The use of warranties in insurance contracts has been a controversial subject for over 200<br />
years. 1 Insurers defend the practice of securing contractual promises from proposers on the basis that<br />
the principle of freedom of contract legitimises the practice, arguing that warranties provide an insurer<br />
with effective protection from fraudulent proposers and assist the insurer in fixing or circumscribing the<br />
risk. Warranties have been attacked as being traps for proposers (and concealed traps at that) 2 and<br />
mechanisms whereby an insurer may extract binding promises from proposers on a wide range of<br />
undiscoverable and irrelevant facts which can serve to allow the insurer to avoid paying out on the policy.<br />
While insurers acknowledge that warranties are capable of operating harshly where the proposer has<br />
acted bona fide (in such cases insurers indicate that industry practice is not to invoke a warranty which<br />
has no causal link to the loss occasioned) 3 all major common law jurisdictions have either legislated to<br />
restrict the operation of contractual warranties or are in the process of doing so. 4<br />
5.02 In Part B, the <strong>Commission</strong> examines the law relating to warranties in general and suggests a<br />
number of reform proposals. The <strong>Commission</strong> then examines in Part C the specific issues of causation,<br />
the response of the PEICL to promissory warranty provisions and the relationship between promissory<br />
warranties and exclusions.<br />
B<br />
Warranties in General<br />
5.03 Warranties clearly have draconian effects when the proposer is being required to warrant the<br />
truth of all facts provided to the insurer. In such a context the Supreme Court, in Farrell v South East<br />
Lancashire <strong>Insurance</strong> Co 5 held that materiality is irrelevant in such a case; Kennedy CJ remarked that this<br />
is ―undoubtedly a very hard case‖ but the Supreme Court was unable to lessen the impact of the law on<br />
the proposer. However, not all warranties are objectionable or have such oppressive consequences.<br />
5.04 In the 19 th Century the Irish judge Palles CB expressed the view that temporal restrictions<br />
which can be viewed as promissory warranties are the subject of rules of interpretation that require such<br />
1<br />
2<br />
3<br />
4<br />
5<br />
Eg. Hasson, ―The Basis of the Contract Clause in <strong>Insurance</strong> <strong>Law</strong>” (1971) 34 MLR 29 traces the shift in<br />
bargaining power over the centuries; Clarke, ―<strong>Insurance</strong> Warranties: the absolute end?‖ [2007] LMCLQ 474;<br />
Soyer, ―<strong>Reform</strong>ing <strong>Insurance</strong> Warranties – Are we finally moving Forward?” In Soyer, <strong>Reform</strong>ing Marine and<br />
Commercial <strong>Insurance</strong> <strong>Law</strong> (Informa <strong>Law</strong> 2008).<br />
In the 2007 Consultation Paper the <strong>Law</strong> <strong>Commission</strong>s observed that ―insurers use warranties for a number of<br />
purposes: to provide an additional remedy if information given by the proposer was incorrect; as an alternative<br />
method of defining the risk; to require the insured to take specified precautions; and to allow the insurer to<br />
escape from the contract should there be a change in the risk. This is possible because the wide variety of<br />
obligations on the insured can be given warranty status if the contract makes this sufficiently clear.‖<br />
Eg Hasson, ―The Basis of the Contract Clause in <strong>Insurance</strong> <strong>Law</strong>” (1971) 34 MLR 29; see also the IIF Code of<br />
Practice on Non Life <strong>Insurance</strong> which provides: ―Neither the proposal form nor the policy shall contain any<br />
general provision converting the statements as to past or present fact in the proposal form into warranties.<br />
But insurers may require specific warranties about matters which are material to the risk.‖ But see Buckley;<br />
―Self Regultation does not work” [2005] CLP 10.<br />
Eg New Zealand, <strong>Insurance</strong> <strong>Reform</strong> Act 1977; Australia, <strong>Insurance</strong> Act 1984. Canadian law does not have a<br />
uniform approach. Warranties are virtually unknown to continental insurance contracts.<br />
[1933] IR 297.<br />
109
terms to be construed by reference to a reasonableness standard, 6 but this is not a universally accepted<br />
proposition. Such differences of judicial approach suggest that legislative intervention in Ireland is<br />
overdue. The <strong>Commission</strong> notes that industry practices themselves seek to ameliorate the harsh<br />
consequences that follow from a strict application of the law. Insurers may, through contract, place a<br />
reasonable limitation on the matters a proposer may be required to warrant. McAleenan v<br />
AIG(Europe)Ltd 7 demonstrates that a basis of contract clause may within its own terms qualify the<br />
insurer‘s right to avoid the policy. In that case the recorded facts in the proposal form were declared to be<br />
―the basis of the policy‖, but nevertheless the insurers undertook not to avoid the policy for non-disclosure<br />
or misrepresentation of facts or untrue statements in the proposal form if the omission or statement was<br />
―innocent and free of any fraudulent intent,‖ the onus of proof resting on the insurer. This industry<br />
practice practice is to be welcomed, but the <strong>Commission</strong> do not see this as an acceptable substitute for<br />
legislative intervention prohibiting the use of warranties in unacceptable or unjustifiable ways.<br />
(1) Warranties and Representations<br />
5.05 Lord Mansfield characterised a warranty as being a term which is part of a written policy<br />
whereas a representation is external to the policy or contract. 8 Furthermore, while compliance with a<br />
representation may be judged with a degree of flexibility, a warranty is strictly interpreted. In De Hahn v<br />
Hartley 9 a policy of insurance was taken out in 1779 in respect of a ships sailing from Liverpool to the<br />
West Indies. The ship was warranted to have a complement of 50 hands but on departure from Liverpool<br />
only 46 hands were on board. The vessel stopped in Anglesey some hours later and took on six more<br />
men. The ship was lost (with all 52 hands) off the coast of Africa when it was seized by brigands. Lord<br />
Mansfield observed that:<br />
―There is a material distinction between a warranty and a representation. A representation<br />
may be equitably and substantially answered; but a warranty must be strictly complied with.<br />
Suppose a warranty to sail on the 1st of August, and the ship did not sail till the 2nd, the<br />
warranty would not be complied with. A warranty in a contract of insurance is a condition or a<br />
contingency and unless that be performed, there is no contract. It is perfectly immaterial for<br />
what purpose a warranty is introduced; but, being inserted, the contract does not exist unless it<br />
be literally complied with‖. 10<br />
5.06 It has been observed 11 that the word of ―warranty‖ in insurance law has a similar meaning to<br />
that of ―condition‖ in sale of goods law, i.e. it is a term, ―the breach of which might give rise to a right to<br />
treat the contract as repudiated‖. 12 While this is the case, should a warranted fact not be accurate at the<br />
commencement of the cover, the result is that the insured was never on cover because the breach of<br />
warranty, as a breach of a condition precedent, means there is no contract. Breach of warranty entitles<br />
the insurer to avoid the contract ab initio, there being no requirement to show that the fact warranted was<br />
material or that the breach was relevant to the circumstances of the loss, and, subject to contractual<br />
provisions to the contrary, this rule is set out in the Marine <strong>Insurance</strong> Act 1906. 13 Such obligations are<br />
sometimes described as contingent conditions, rather than promissory conditions, in general commercial<br />
law.<br />
6<br />
7<br />
8<br />
9<br />
10<br />
11<br />
12<br />
13<br />
Gorman v The Hand in Hand <strong>Insurance</strong> Co (1877) IR 11 CL 224.<br />
[2010] IEHC 128.<br />
Pawson v Watson (1778) 2 Cowp. 785; see also Lord Eldon in Newcastle Fire Company v Macmorran & Co<br />
(1815) 3 Dow P.C. 255, both followed in Quin v National Assurance Co (1839) Jo. & Car. 316.<br />
(1786) 1 TR 343.<br />
(1786) 1 TR 343 at 345.<br />
<strong>Law</strong> <strong>Commission</strong>, Report No. 104, paragraph 6.2<br />
Sale of Goods Act 1893, s.11(2)<br />
Section 33(3).<br />
110
(2) Warranties – Matters of substance not form<br />
5.07 In HIH Casualty and General <strong>Insurance</strong> Ltd v New Hampshire <strong>Insurance</strong> Co 14 Rix LJ said that<br />
whether a warranty exists or not:<br />
―it is a question of construction and the presence or absence of the word ―warranty‖ or<br />
―warranted‖ is not conclusive. One test is whether it is a term which goes to the root of the<br />
transaction; the second, whether it is descriptive of or bears materially on the risk of loss; a<br />
third whether damages would be an unsatisfactory or inadequate remedy.‖ 15<br />
5.08 MacGillivray summarises the essential characteristics of a warranty in the following terms:<br />
―(i) it must be a term of the contract;<br />
(ii) the matter warranted need not be material to the risk;<br />
(iii) it must be exactly complied with; and<br />
(iv) a breach discharges the insurer from liability on the contract notwithstanding that the loss<br />
has no connection with the breach or that the breach has been remedied before the time of the<br />
loss.‖ 16<br />
MacGillivray‘s four qualifying factors will be examined in turn.<br />
(3) The warranty must be a term of contract.<br />
5.09 While no specific form of words are necessary for a stipulation to be held to be a warranty, the<br />
current practice is to expressly provide that certain stipulations are to be conditions precedent to the<br />
insurers‘ obligation to pay out on the policy. The Supreme Court, in Re Application of Butler 17 held that a<br />
covenant in a policy of motor insurance that required the insured to give notice of any accident ―as soon<br />
as practicable‖ was a condition precedent, not least because the policy itself expressly so provided.<br />
There is no obligation in such instances to show that non compliance has been prejudicial. 18 Should the<br />
policy not expressly stipulate that the provision or requirement is a condition precedent to a valid claim, a<br />
court will have to consider whether a condition precedent was intended. If insufficiently clear language is<br />
used then a warranty or a condition precedent may not be inferred. On matters of this kind differences of<br />
judicial perspective are legion, and the cases are incapable of being reconciled.<br />
(4) The matter warranted need not be material to the risk<br />
5.10 Even if the matter warranted is material to the risk, basis of contract clauses have been<br />
criticised as being disproportionate in terms of their application and capable of producing considerable<br />
hardship for the proposer. The most infamous Irish case in this respect illustrates this point perfectly. In<br />
Keenan v Shield <strong>Insurance</strong> Co 19 a house and contents policy was negotiated, the proposal form seeking<br />
details of any previous claims. The proposer answered the question in the negative whereas he had<br />
made a claim for fire damage to a pump the previous year, the claim being for £53. The declaration<br />
recorded that ―the particulars and answers are true and complete in every respect‖. The insurers refused<br />
to meet a subsequent claim for fire damage to the property and Blayney J held they were entitled to do<br />
so, applying Pawson v Watson. 20 Blayney J observed that even if the inaccurate reply to the question<br />
―was trivial, that would be no obstacle to the defendant repudiating the policy in view of the accuracy of<br />
the answers in the proposal form having been warranted by the plaintiff‖. Blayney J reached this<br />
14<br />
15<br />
16<br />
17<br />
18<br />
19<br />
20<br />
[2001] EWCA (Civ) 735.<br />
Ibid, para 101, followed in GE Reinsurance Corp v New Hampshire <strong>Insurance</strong> Co [2003] EWHC 302 (Comm).<br />
Paragraph 10-003.<br />
[1970] IR 45; Patton v Employers Liability (1887) 20 LR(Ir) 93. Contrast Weir v Northern Counties of England<br />
<strong>Insurance</strong> Co (1879) 4 LR (Ir)216 where no express warranty terminology was used in the proposal form.<br />
Gaelcrann Teoranta v Payne [1985] ILRM 109.<br />
[1987] IR 113.<br />
(1788) 2 Cowp 785.<br />
111
conclusion, ―with considerable regret‖ given the hardship caused to the claimant. 21 While the incorrect<br />
answer given by Keenan in this case was in relation to a previous trivial claim, the matter to which the<br />
question was addressed was at least material. Where the risk is immaterial to the fact or facts that are<br />
warranted, it is hardly surprising that there is a torrent of judicial utterances on the impropriety of such<br />
warranty practices, even if no English or Irish case-law exists in which overt efforts to counteract<br />
warranties have been mounted (e.g. by way of good faith or unconscionability, for example) on a<br />
sustained basis. Even though the leading case of Anderson v Fitzgerald 22 demonstrates a concern to<br />
limit contractual warranties 23 it is as well to bear in mind that Lord St. Leonards‘ famous dicta 24 represent<br />
expressions of judicial impotence, not activism. In this ―difficult case‖ 25 the insurer had drafted a proposal<br />
form for life insurance in such a way as to allow the insurer to retain premiums as well as refuse to meet<br />
any claim on the grounds of false statements made in response to the questions in the proposal form.<br />
There were two incorrect answers made in relation to questions posed which were clearly material to the<br />
risk. Lord St. Leonards proposed to read down the offending clause by reading ―false‖ as meaning a<br />
―wilful misstatement‖ rather than ―untrue statement‖. However, while finding that the Company was<br />
correct to resist the claim, Lord St. Leonards went on to observe that ―I cannot think the Company to be<br />
right in so framing a policy‖. 26 Lord St. Leonards stressed that the law should provide a balance between<br />
insurance companies being able to protect themselves from fraudulent practices while affording ―a fair<br />
security to the person with whom the policy is made, that, upon the ordinary construction of language, he<br />
is safe in the policy which he has accepted‖. Lord St. Leonards went on to observe that if such a<br />
warranty could be extracted in circumstances of this kind, he had no doubt:<br />
―that that very important branch of insurance, life-insurance, will become very distasteful to<br />
people, and that no prudent man will effect a policy of insurance with any company without<br />
having an attorney at his elbow to tell him what the true construction of the document is. And,<br />
indeed, in this case it has been necessary to consult all the Judges in Ireland, and they having<br />
decided in one way upon the language of this policy, the Judges of England have been<br />
consulted, and they have come to a different opinion [to those of their Irish Brethren]‖. 27<br />
(5) It must be exactly complied with<br />
5.11 While the approach taken in respect of a representation is to give the proposer a degree of<br />
latitude in respect of trivial misstatements or omissions, 28 the same is not the case where a statement is<br />
warranted. Strict and exact compliance is necessary. In response to a question concerning the price<br />
paid by the owner of a motor vehicle the reply given was £285 when only £271 had been paid. The<br />
breach of a warranty clause allowed the insurer to vitiate the policy when a claim was made: see Allen v<br />
Universal Automobile <strong>Insurance</strong>. 29 While efforts are made to ameliorate the consequences of this rule by<br />
21<br />
22<br />
23<br />
24<br />
25<br />
26<br />
27<br />
28<br />
29<br />
A further appeal to the Supreme Court on another point was dismissed at [1988] IR 89.<br />
In the Irish Court of Exchequer Chamber see (1852) 1 ICLR 251: House of Lords (1853) 3 ICLR 475 and<br />
(1853) 4 HLC 484.<br />
Especially in the Irish Court of Exchequer Chamber by way of importing a materiality requirement into the<br />
warranty. This position was reversed by the House of Lords.<br />
―A policy ought to be so framed that he who runs can read. It ought to be framed with such deliberate care,<br />
that no form of expression by which the party assured can be caught on the one hand, or by which the<br />
company can be cheated on the other shall be found upon the face of it, and nothing shall be wanting in it the<br />
absence of which may lead to such results‖ (1853) 3 ICLR 475 at 488.<br />
See Pan Atlantic <strong>Insurance</strong> Co Ltd v Pine Top <strong>Insurance</strong> Co. Ltd [1994] 3 All ER 581 at 611 (Lord Mustill).<br />
(1853) 3 ICLR 475 at 493 – text slightly different to that at 4 HLC (text quoted is from 4 HLC).<br />
(1853) 3 ICLR 475 at 491 (text quoted from 4 HLC at p.514).<br />
MacGillivray, paragraph 16-024.<br />
(1933) 45 Lloyd‘s Rep.55; Farrell v SE Lancs <strong>Insurance</strong> Co [1933] IR 36.<br />
112
eference to the plain and ordinary meaning approach to the construction of the warranty 30 , or via contra<br />
proferentem interpretation of the warranty 31 , exact compliance remains the proposers primary obligation.<br />
The old Irish case of Quin v National Assurance Company 32 held that the misdescription of the property<br />
and usage of property was by the policy made a matter of warranty, not a representation, and in such a<br />
case ―the materiality of the misdescription is then out of the question‖.<br />
(6) A breach discharges the insurer from liability on the contract, even if the loss has no<br />
connection with the breach or that the breach has been remedied before the loss<br />
5.12 In the first situation covered by this fourth element, in MacGillivray‘s summation 33 of the law<br />
relating to insurance warranties, the warranty is unaffected by any causation argument. A warranty that a<br />
motor vehicle is in a roadworthy condition when it is not will allow the insurer to avoid the policy even if<br />
the vehicle is damaged or destroyed by an unrelated event such as a fire in the premises where the<br />
vehicle is garaged. 34 A promissory warranty to maintain a fire alarm which is not observed will be likely to<br />
allow the insurer to decline to refuse to pay out a claim in respect of flood damage relating to the insured<br />
property. 35 The second situation is illustrated by De Hahn v Hartley, 36 considered above; many of the<br />
cases are marine insurance cases where an unseaworthy vessel is put into a seaworthy state prior to the<br />
risk of loss or damage materialising, to no avail to the proposer. Rectification of the factual position<br />
constituting the breach of warranty will not avail the insured.<br />
(7) Amelioration of the strict rules relating to warranties<br />
5.13 In relation to the duty of full disclosure, it has been shown that Lord Mansfield‘s formulation of<br />
the duty 37 was tempered by a number of exceptions and that both the duty and the exceptions have been<br />
gathered up into statutory form in s.18 of the Marine <strong>Insurance</strong> Act 1906. While Lord Mansfield did not<br />
undertake a similar balancing exercise in relation to warranties, later judges have tried to minimise these<br />
rules relating to warranties under the guise of seeking to interpret the contract in such a way as to give<br />
effect to the intentions of the parties. Some examples may be instructive.<br />
5.14 Warranties that prescribe a limited remedy or require materiality to be shown will limit the right<br />
to avoid the policy. London Loan and Savings Co of Canada v Union <strong>Insurance</strong> Co of Canton Ltd 38<br />
supports the view that, absent a stipulated right to avoid the policy, an insurer may recover only damages<br />
or the relief actually set out in the contract. Repudiation of a claim without repudiation of the policy is not<br />
possible: West v National Motor & Accident <strong>Insurance</strong> Union Ltd. 39<br />
5.15 Some judges show a reluctance to view a warranty as a promissory or a continuing warranty.<br />
Some courts will favour a warranty as being declaratory of existing facts and as not speaking to future<br />
events. Sweeney & Kennedy‟s Arbitration 40 is the leading Irish case in which a question phrased as to<br />
30<br />
31<br />
32<br />
33<br />
34<br />
35<br />
36<br />
37<br />
38<br />
39<br />
40<br />
eg Yorke v Yorkshire <strong>Insurance</strong> [1918] 1 KB 662; Rohan Construction Ltd v <strong>Insurance</strong> Corporation of Ireland<br />
Ltd [1986] ILRM 419.<br />
eg Weir v Northern Counties of England <strong>Insurance</strong> Company (1879) 4 LR (IR) 260; Sweeney and Kennedy‟s<br />
Arbitration [1950] IR 85.<br />
(1839) Jo & Car 316.<br />
Paragraph 10-003.<br />
Dawsons v Bonnin [1922] 2 AC 413; Farrell v SE Lancashire <strong>Insurance</strong> Co [1933] IR 36; O‟Callaghan v Irish<br />
National <strong>Insurance</strong> Co (1934) 68 ILTR 248.<br />
<strong>Law</strong> <strong>Commission</strong>s Consultation Paper (2007) paragraph 1.14.<br />
(1786) 1 TR343; Foley v Tabor (1861) 2F&F 663<br />
In Carter v Boehm (1766) 3 Burr.1905.<br />
[1925] 4 DLR 676; Wood v Dwaris (1856) 11 Exch.493.<br />
[1955] 1 All ER 800, This is a controversial decision but the judges view with ―distaste‖ the conduct of the<br />
insurer in using an error that could have been an innocent mistake for rejecting a claim (Romer LJ at p.803).<br />
[1950] IR 85.<br />
113
the present was held not to be promissory in nature. Manor Park Homebuilders 41 is also in point: a<br />
statement as to the current efficacy of an alarm was not read as a promissory warranty to keep the alarm<br />
in working order.<br />
5.16 Statements may be held to be suspensory conditions and/or terms descriptive of the risk. A<br />
court may interpret a statement as being intended to describe the risk being insured against rather than to<br />
constitute a warranty 42 . For example, where a motor policy was taken out in respect of ―commercial<br />
travelling‖, the insurer was clearly not liable to meet a claim when the vehicle was being used as a touring<br />
vehicle, but the English Court of Appeal observed that liability would resume if the insured use as<br />
described was reverted to. 43 A motor insurance policy in respect of a lorry that was described as being<br />
used to carry coal was thus held to be on cover when it was in an accident whilst carrying coal,<br />
notwithstanding that it had shortly before been used to transport timber. The departure from the usage<br />
suspended the cover until the warranted use resumed. 44 This reasoning on suspensory conditions is also<br />
to be found in Brady v Irish National <strong>Insurance</strong> Co Ltd. 45 It is evident that this approach is capable of<br />
creating a considerable level of uncertainty as to the result that will follow if statements relating to the use<br />
to which property is to be put are litigated 46 so even well intentioned judicial efforts to soften the impact of<br />
warranties law may exacerbate an already unsatisfactory situation.<br />
5.17 English case-law holds that the insurer may lose any right to rely on a breach of warranty in a<br />
variety of ways such as by making an express promise to this effect, through waiver and by estoppel<br />
(acceptance of a premium after acquiring knowledge of breach, for example). The Good Luck 47 suggests<br />
that the principles applicable to election are inappropriate in the context of breaches of a promissory<br />
warranty and conditions precedent; because the contract is void ab initio there is nothing for an election to<br />
operate against. The Good Luck raised issues relating to marine insurance and the scope of the Good<br />
Luck has yet to be considered in Ireland. There are some older Irish cases which hold that waiver of a<br />
right to avoid a policy 48 and unconsionability 49 may result in the policy being enforceable.<br />
(8) Statutory Intervention<br />
5.18 The <strong>Insurance</strong> Act 1936 sought to protect vulnerable proposers in industrial insurance<br />
contracts from the effects of misstating the age of the insured and the consequences of details of the<br />
health of the insured life being incorrectly provided by employees of the insurer. 50<br />
5.19 In the period between the 1936 Act and the next significant piece of legislation addressing<br />
contractual issues, the <strong>Insurance</strong> Act 1989, the O‘Donoghue Committee 51 delivered a number of reports<br />
41<br />
42<br />
43<br />
44<br />
45<br />
46<br />
47<br />
48<br />
49<br />
50<br />
51<br />
Manor Park Homebuilders Ltd v AIG Europe (Ireland) Ltd [2009] 1 ILRM 190, following Hussain v Brown<br />
[1996] 1 Lloyd‘s Rep. 627.<br />
Farr v Motor Traders Mutual <strong>Insurance</strong> [1920] 3 KB 669.<br />
Roberts v Anglo Saxon <strong>Insurance</strong> Co (1927) 27 Lloyd‘s Rep. 313.<br />
Provincial <strong>Insurance</strong> v Morgan [1933] AC 240.<br />
[1986] ILRM 698 (warranty suspended when pleasure craft laid up for winter).<br />
See Kler Knitwear v Lombard General <strong>Insurance</strong> Co [2000] Lloyd‘s Rep IR 47, discussed in the <strong>Law</strong><br />
<strong>Commission</strong> Consultation Paper (2007) paragraphs 2.62 – 2.65. Later cases of interest include AC Ward &<br />
Son Ltd v Catlin (Fire) Ltd [2010] Lloyd‘s Rep IR 695 and Sugarhut Group Ltd v Great Lake Reinsurance (UK)<br />
plc [2011] Lloyd‘s Rep IR 198.<br />
[1992] 1 AC 233; Kosmar Villa Holidays plc v Trustees of Syndicate 1243 [2008] 2 All ER (Comm) 14;<br />
Lexington <strong>Insurance</strong> Co v Multinational De Seguros SA [2009] 1 All ER (Comm) 35; Walbrook Trustees<br />
(Jersey) Ltd v Fattal [2009] EWCA Civ 297.<br />
Armstrong v Turquand (1858) 9 ICLR 32; Car and General <strong>Insurance</strong> Corporate v Munden [1936] IR 584.<br />
Tuffnell v O‟Donoghue [1897] 1 IR 360.<br />
Sections 61-64. See O‟Callaghan v Irish National <strong>Insurance</strong> (1934) 68 ILTR 248 and Griffen v Royal Liver<br />
(1942) 76 ILTR 82.<br />
See the Final Report, Prl. 5330.<br />
114
on insurance regulation, but the question of controlling the use of warranties did not feature in any of<br />
these reports. Notwithstanding the lack of scrutiny by O‟Donoghue, section 61 of the 1989 Act provided<br />
the Minister for Industry and Commerce with a power to, by order ―prescribe codes of conduct to be<br />
observed by undertakings in their dealings with proposers of policies of insurance and policy holders<br />
renewing policies of insurance in respect of duty of disclosure and warranties‖. No codes of conduct have<br />
been prescribed.<br />
(9) Warranties – Incorporation Requirements<br />
5.20 In cases of marine insurance, s.35(2) of the Marine <strong>Insurance</strong> Act 1906 states that an express<br />
warranty must be contained in the policy either in its own terms or contained in some document<br />
incorporated by reference into the policy. This statutory rule is confined to marine insurance, but, by<br />
reference to basic contract principles, any express warranty should preferably be set out in some<br />
documentary format such as a proposal form if the insurer is to persuade a court that a warranty was<br />
made and/or intended. Proposal forms appear to be the most usual means of conveying warranty<br />
obligations, but MacGillivray objects to this kind of practice on the ground that it will not be clear to the<br />
proposer what his/her obligations are, particularly in the context of continuing obligations 52 . The recent<br />
Irish case of Manor Park Homebuilders Ltd v AIG Europe (Ireland) Ltd 53 attests to the soundness of<br />
MacGillivray‘s observation. Here, a rudimentary proposal form was used to gather up information on<br />
details of premises for fire insurance cover. Statements were made as part of this process but no formal<br />
proposal form, policy or indeed any other documentation was issued. McMahon J. held that no<br />
warranties had been intended. The learned judge, it is submitted, could also have decided that no<br />
warranties had been made because no documents purporting to gather the information together into a<br />
contractual form had been created. It is noteworthy that two early Irish cases that appear to hold that<br />
statements of fact contained in or incorporated into policy documents may be presumed to be<br />
warranties 54 were not discussed. This situation is to be distinguished from Manor Park Homebuilders on<br />
the ground that no policy documents were executed in Manor Park Homebuilders so there was no basis<br />
upon which to presume a (verbal) undertaking to be an express warranty. The law thus seems to require<br />
the insurer to provide an adequate amount of information to be provided to a proposer at the precontractual<br />
stage and some evidence (eg documentary, recorded phone call) that a promise or statement<br />
was given and a warranty intended, and absent such evidence, a court may be inclined to leave an<br />
insurer to rely on whatever remedies for misrepresentation the insurer may invoke.<br />
5.21 While both the Marine <strong>Insurance</strong> Act 1906, s.35(3), and common law principles recognise the<br />
concept of implied warranties in general, McGillivrary points out that implied terms of fitness and fitness<br />
for purpose are not normally implied into contracts of insurance other than seaworthiness obligations in<br />
marine insurance. 55<br />
5.22 The <strong>Commission</strong> provisionally recommends that the entitlement of an insurer to avoid a policy<br />
or a claim for breach of warranty should depend on whether the insured was provided at the precontractual<br />
stage, or contemporaneously with the conclusion of the contract, with the information required<br />
by the duty of disclosure (as already defined in this Consultation Paper). The <strong>Commission</strong> provisionally<br />
recommends that, in respect of promissory or continuing warranties that arise after the contract has been<br />
agreed, the insurer must provide the proposer with a clear statement prior to the formulation of the<br />
contract about the scope of the continuing obligations imposed upon the proposer when he or she<br />
becomes the insured. The <strong>Commission</strong> invites submissions on how this requirement may best be<br />
satisfied, particularly when the cover is obtained on-line.<br />
52<br />
53<br />
54<br />
55<br />
Paragraph 10-023.<br />
[2009] 1 ILRM 190.<br />
See MacGillivray at 10-031, and discussions in Sceales v Scanlan (1843) 6 Ir.L.R.367 and Quin v National<br />
Assurance Company (1839). Jo & Car 316.<br />
Para 10-032.<br />
115
(10) Limiting the scope of the warranty<br />
5.23 According to the Privy Council, in Zeller v British Caymanian <strong>Insurance</strong> Co plc 56 a warranty<br />
need not contain a reference to a basis of contract clause for an inaccurate warranty of existing facts to<br />
justify an insurer‘s refusal to honour the policy. In many cases the issue will be the scope of the warranty<br />
itself. Even if the warranty is qualified by the facts being warranted ―to the best of the proposer‘s<br />
knowledge or belief‖, the qualification will not be enough to excuse all factual inaccuracies and merely<br />
guessing whether a given state of affairs existed will not be excused 57 although an honest belief that a<br />
property is in good repair, for example, may not be such as to allow an insurer to avoid the contract ab<br />
inito if investigation of the facts, on an objective basis, reveals that it was not in good repair at the<br />
commencement of cover: Wilkie v Direct Line <strong>Insurance</strong> .58 The cases on health insurance and pre<br />
existing conditions suggest that the warranties as to the health of the life in question which are based on<br />
a question such as, ―are you in good health?‖ raise questions about whether the insurer is seeking an<br />
expression of opinion or a statement of fact. In the leading Irish case of Keating v New Ireland Assurance<br />
Company 59 the Supreme Court subjected an alleged warranty that answers were ―true and complete‖ to a<br />
contra proferens interpretation, observing that because the life to be insured was unaware of his true<br />
medical condition he had not breached any warranty. The Supreme Court thus appears to have equated<br />
―true‖ as meaning ―accurate to the knowledge of the proposer‖. McCarthy J. observed:<br />
―If the proposal form were to contain a statement by the proposer that the statements and<br />
answers written in the proposal together with the written statements and answers made to the<br />
company‘s medical examiner shall form the basis of the proposed contract ―even if they are<br />
untrue and incomplete for reasons of which I am totally unaware‖, would there be any takers<br />
for such a policy?‖ 60<br />
5.24 Coleman v New Ireland Assurance Plc 61 provides the most recent demonstration of the fact<br />
that where a declaration that facts disclosed by a proposer are declared to be true ―to the best of my<br />
knowledge‖, the declaration will not necessarily provide the insurer with a right of avoidance, ―even in the<br />
face of the proposer‘s ignorance or obtuseness‖. If the circumstances however suggest suppression of<br />
facts, i.e. the proposer falsely states he is in good health when he has recently had an epileptic attack, or<br />
promises that he has not been treated for a disease, the contract may be void under the warranty. 62<br />
(11) Basis of Contract Clauses<br />
5.25 An insurer who seeks to persuade a court that a strict warranty was intended, even absent a<br />
policy document, will seek to do so by inserting into the pre contractual document a basis of contract<br />
clause. 63 A provision that states that all answers given are true and complete, and/or that the answers<br />
are the basis of the contract, can fulfil a number of purposes.<br />
(1) the accuracy of the answer is warranted and, as such, it provides a contractual basis for refusing<br />
to pay out on the policy rather than leaving the insurer to reply on misrepresentation;<br />
(2) the inaccuracy of the answer may provide an alternative to avoiding the policy on the grounds of<br />
non-disclosure;<br />
56<br />
57<br />
58<br />
59<br />
60<br />
61<br />
62<br />
63<br />
[2008] UKPC 4.<br />
Unipac (Scotland) Ltd v Aegon <strong>Insurance</strong> Company UK Ltd [1999] 1 Lloyd‘s Rep.502.<br />
[2007] CSOH 145.<br />
[1990] 2 IR 383; Fowkes v Manchester and London Assurance (1863) 3 B&S 917.<br />
Ibid at 399; FBD <strong>Insurance</strong> plc v Financial Services Ombudsman [2011] IEHC 315<br />
[2009] IEHC 273.<br />
Curran v Norwich Union Life <strong>Insurance</strong> Co [1987] IEHC5; Abbot v Howard (1832) Hayes 381.<br />
Hasson (1971) 34 MLR 29; basis of contract clauses can be open to review under the Unfair Contract Terms<br />
Regulations (SI No. 27 of 1995) in consumer insurance contracts and there are some regulatory statements<br />
about basis of contract clauses but the Scottish case of Unipac (Scotland) Ltd v Aegon <strong>Insurance</strong> [1996] SLT<br />
1197 shows that such clauses are still legally effective.<br />
116
(3) the basis of contract clause renders issues of materiality and inducement irrelevant whereas<br />
these factors remain relevant to non-disclosure and misrepresentation; and<br />
(4) issues of fraudulent intent, negligence and innocence will be irrelevant in the majority of basis of<br />
contract situations. For example, if a clause expressly provides that breach will render the contract void<br />
do initio and no premiums will be returned, the clause will be effective regardless of the degree of<br />
culpability shown against the proposer.<br />
5.26 In Dawsons Ltd v Bonnin, 64 a motor insurance policy was subject to a basis of contract clause<br />
in which the proposer mistakenly warranted that the vehicle was usually parked on business premises<br />
when it was not; the claim was brought in respect of loss by fire, something that was immaterial to the<br />
question posed. This is also the law in Ireland: Farrell v South East Lancashire <strong>Insurance</strong> Co. 65<br />
5.27 There are Irish cases where the ―basis of contract‖ clause itself does not appear to operate<br />
harshly because of context: the matters misstated were clearly either done fraudulently or related to<br />
material factors, or both. Misstatements in health insurance that family members had not died through<br />
pulmonary disorders 66 nor that other policies had not been obtained 67 or proposals declined 68 were clearly<br />
material matters. Failure to accurately detail a previous household fire claim was arguably material to a<br />
domestic all risks application. 69 But the real hardship that warranties cause in the context of incorporation<br />
is that most proposers with no specialist knowledge of insurance practice would not understand the<br />
draconian effects that such clauses will trigger because ―basis of contract‖ clauses are terms of art. The<br />
<strong>Law</strong> <strong>Commission</strong>‘s 2007 Consultation Paper at paragraph 2.112 clearly condemns the fact that<br />
―An obscure legal device can convert a statement on the proposal form into a warranty. If a<br />
policyholder signs the proposal form stating that they warrant the accuracy of all their answers<br />
or one stating that their answers ―form the basis of the contract‖ then the answers in the<br />
proposal form will be elevated to warranties. This means that the law according to warranties<br />
applies and the insurer is entitled to be discharged from liability if any statement is inaccurate.‖<br />
5.28 That a basis of contract clause can ―trump‖ compliance with the duty of disclosure will<br />
exacerbate the position of the proposer is illustrated by several decisions. In Mackay v London General<br />
<strong>Insurance</strong> Co 70 the failure by a motorcyclist to reveal that he had been fined in respect of a minor road<br />
traffic offence was held not to be a material non disclosure, but because he had signed a basis of contract<br />
clause warranting that he had never been convicted the policy was held never to have come into effect.<br />
Swift J held the contract was void ab initio but said the insured had been very badly treated. The insurers<br />
had taken the premium and had not been in the least bit misled by the replies the insured had made to<br />
questions posed in the proposal form. In contrast, McCarthy J, in Keating v New Ireland Assurance<br />
Company 71 approached the basis of contract clause from a different direction, indicating that these<br />
clauses hid or obscured the legal consequences for which the insurer contended, the learned judge<br />
taking the view that there would be no takers for insurance cover if clauses and their effects in law were<br />
clearly set out. Lord Wrenbury observed that reliance on a basis of contract clause or warranty<br />
constituted ―a mean and contemptible policy [and a]… contemptible defence‖ 72 . Irish judges in particular<br />
64<br />
65<br />
66<br />
67<br />
68<br />
69<br />
70<br />
71<br />
72<br />
[1922] 2 AC 413.<br />
[1933] IR 297.<br />
Anderson v Fitzgerald (1853) 3 ICLR 475 at p.492.<br />
See Scanlan v Sceals (1843) 6 Ir LR 367 and Rose v Star <strong>Insurance</strong> Co (1850) 2 Ir Jur 206 for cases involving<br />
procedural requirements frustrating these clauses.<br />
See <strong>Insurance</strong> Ombudsman, Digest Case Study 51 (1992-1998).<br />
Keenan v Shield <strong>Insurance</strong> [1987] IR113.<br />
(1935) 51LI.L.R 201.<br />
[1990] 2 I.R. 383. See also Kelleher v Irish Life Assurance Co [1993] ILRM 643 where the Supreme Court held<br />
that questions in a proposal form could abridge both the duty of disclosure and a declaration that questions<br />
had been truthfully answered following Hair v Prudential Assurance Co Ltd [1983] 2 LI.L.R 667.<br />
Glicksman v Lancashire & General Assurance Co [1927] AC 139 at 144-5.<br />
117
have been forthright in suggesting that the law on warranties tends to favour the commercially<br />
sophisticated insurer over the inexperienced proposer 73 and that no account is taken of the degrees of<br />
culpability involved 74 , but, in general, a well drafted warranty will be given effect. Indeed, even an<br />
obscurely worded one will not necessarily be denied effect, even if some of the most distinguished judicial<br />
minds of the day differ on the meaning to be attributed to the warranty. Anderson v Fitzgerald 75 is of<br />
course the best example of this insofar as three judicial proceedings in Ireland on a net point of<br />
interpretation were set at nought by a unanimous House of Lords.<br />
5.29 The <strong>Commission</strong> provisionally recommends that legislation should provide that statements of<br />
fact or opinion shall not be converted into a contractual warranty by anything stated in the contract, so<br />
that “basis of the contract” clauses shall be deemed invalid.<br />
(12) Warranties in Irish <strong>Law</strong>: the IIF Codes of Practice<br />
5.30 As already noted, section 61 of the <strong>Insurance</strong> Act 1989 provides the Minister for Finance with<br />
the power to prescribe codes of conduct in respect of ―duty of disclosure and warranties‖ when the<br />
Minister considered it necessary in the public interest, after consultation with the insurance industry and<br />
consumer representatives, to do so. The Irish <strong>Insurance</strong> Federation (IIF) responded by producing various<br />
Codes of Practice. These Codes of Practice reflected the earlier UK Codes and were clearly conceived<br />
to address some of the procedural, formal and substantive objections to warranties.<br />
5.31 The Code of Practice on Non Life <strong>Insurance</strong> stated:<br />
―Neither the proposal form nor the policy shall contain any general provision converting the<br />
statements as to past or present fact in the proposal form into warranties. But insurers may<br />
require specific warranties about matters which are material to the risk.‖<br />
5.32 The Codes on life assurance and obtaining medical reports stated that the same approach will<br />
hold true in those areas but added that such general provisions could be used in ―life of another‖ policies.<br />
It is to be noted that ―shall‖ rather than ―should‖ appears in this context. The distinction between general<br />
provisions (that may actually have referred to material as well as irrelevant facts) and specific provisions<br />
(which must be material) constituted a significant advance on the common law position and section 33(3)<br />
of the Marine <strong>Insurance</strong> Act 1906.<br />
5.33 The right to avoid the policy was similarly abridged under the Non-Life <strong>Insurance</strong> Code of<br />
Practice which provided that the right would not be used on the grounds of breach of warranty or<br />
condition when the circumstances of the loss are unconnected with the breach unless fraud is involved.<br />
In the case of life or life-related policies a more complex provision was in place which essentially provided<br />
that a breach of warranty would not invalidate the claim unless the circumstances of the claim are<br />
connected with the breach and a specific warranty was created, material to the risk, which was drawn to<br />
the proposer‘s attention before or at time of contracting.<br />
5.34 In relation to the provision of completed proposal forms and policy documents the Code was<br />
much weaker, stopping short of imposing a mandatory requirement on the part of insurers to provide<br />
copies, other than upon request or in the course of the insurer‘s normal practices.<br />
5.35 The Codes however also set out a standard in respect of the kinds of question that the insurer<br />
should ask, providing that ―insurers should avoid asking questions which would require knowledge<br />
beyond that which the signatory could reasonably be expected to possess‖. Warranty disputes do not<br />
feature as significant issues in <strong>Insurance</strong> Ombudsman adjudications.<br />
73<br />
74<br />
75<br />
Abbot v Howard (1832) Hayes 381 at 410-411, per Smith B; Rose v Star <strong>Insurance</strong> Co (1850) 2 Ir.Jur.206 at<br />
209, per Richards B; Anderson v Fitzgerald (1851) 1 ICLR 271 and see Lord St. Leonards at (1853) 3 ICLR<br />
475 at 488 and 491, cited and followed by McCarthy J, in Keating v New Ireland [1990] 2 IR 383 at 399.<br />
On the innocence of the proposer and lack of care taken by companies and their agents see Griffen v Royal<br />
Liver (1942) 76 ILTR 82.<br />
See (1851) 1 ICLR 27; (1853) 3 ICLR 475.<br />
118
(13) United Kingdom Developments on Basis of Contract Clauses<br />
5.36 Basis of the contract clauses were examined separately from warranty issues by the <strong>Law</strong><br />
<strong>Commission</strong> in the 1980 Report and the views and proposals expressed therein have been revisited by<br />
the <strong>Law</strong> <strong>Commission</strong>s in 2007 and 2009. In relation to warranties of past or present fact, the <strong>Law</strong><br />
<strong>Commission</strong> proposed, in 1980, 76 that where these are created by way of a proposal form, any statement<br />
of fact (e.g. a housebuilder warrants that his/her house is constructed of brick and slate) or a declaration<br />
that an answer given is true (e.g. proposer is 30 years of age) will be ineffective in creating a warranty. 77<br />
In the event that the insurer wishes to extract specific undertakings, the insurer should only be able to do<br />
so by way of terms contained in the policy itself, subject of course to the requirement that written notice of<br />
the warranties so incorporated are provided to the proposer as soon as practicable. 78<br />
5.37 In contrast, the use of basis of the contract clauses in relation to warranties as to the future, or<br />
promissory warranties, was not the subject of any specific recommendation because the mischiefs<br />
caused by basis of contract clauses relating to warranties of past or present fact were considered to be<br />
obvious whereas:<br />
―the safeguards and precautions which can be created by promissory warranties are clearly<br />
necessary for insurers and unobjectionable, and there appears to be no reason to prevent their<br />
creation by means of ―basis of the contract‖ clauses as a matter of convenience.‖ 79<br />
5.38 Insofar as a warranty created via a basis of contract clause related to existing and future<br />
conditions (eg the car is roadworthy and will be maintained in a roadworthy condition) the basis of<br />
contract clause would only be effective vis a vis the statement as to the future. Clearly the <strong>Law</strong><br />
<strong>Commission</strong> in 1980 saw the proposed formalities requirements as central to any effective method of<br />
dealing with abuse of contractual principles. 80<br />
5.39 This proposed restriction – basis of contract clauses will not be effective when used in a<br />
proposal form in order to create contractual warranties in relation to matters of past or present fact – was<br />
accompanied by two proposed substantive law adjustments. The <strong>Law</strong> <strong>Commission</strong> recommended that<br />
no matter of past or existing fact should be capable of constituting a warranty unless it related to a matter<br />
which is material to the risk. 81 The second recommendation was directed at counteracting basis of<br />
contract clauses that required the proposer to warrant the absolute accuracy of all or any of the answers<br />
given. The <strong>Law</strong> <strong>Commission</strong> referred back to the 1957 <strong>Law</strong> <strong>Reform</strong> Committee recommendation that,<br />
notwithstanding anything containing in a policy, no defence to a claim can arise from a misstatement<br />
where the insured can prove the statement was true to the best of his knowledge and belief. 82<br />
(14) Basis of Contract Clauses – The British 2007 Consultation Paper<br />
5.40 The <strong>Law</strong> <strong>Commission</strong>s, in the 2007 Consultation Paper were similarly critical of basis of<br />
contract clauses, describing them as ―an obscure legal device‖ allowing insurers to treat themselves as<br />
discharged from the contract ―if any statement is inaccurate‖. 83 Basis of Contract clauses were believed<br />
to be no longer in use as a result of the Industry Code, The Statement of General <strong>Insurance</strong> Practice, the<br />
Statement directing that such clauses should not be used in consumer insurance. The <strong>Law</strong> <strong>Commission</strong>s<br />
recommended that basis of contract clauses should have no effect in consumer insurance law. In relation<br />
to business insurance however, the <strong>Law</strong> <strong>Commission</strong>s were more equivocal. While remarking that, save<br />
in cases where a business proposer is professionally advised, most proposers will not appreciate the<br />
76<br />
77<br />
78<br />
79<br />
80<br />
81<br />
82<br />
83<br />
<strong>Law</strong> Com No.104.<br />
<strong>Law</strong> Com No.104, para. 7.8.<br />
<strong>Law</strong> Com No.104, para. 10.39.<br />
<strong>Law</strong> Com No.104, paras. 7.11 and 10.40.<br />
See para. 7.8.<br />
See paras. 6.2 and 7.7.<br />
See paras. 4.61 and 7.7.<br />
See para. 2.112 of the 2007 Consultation Paper.<br />
119
nature and potentially draconian nature of such clauses, there was no general recommendation to follow<br />
the logic of the Australian Act and relegate such clauses to representations, even in business insurance.<br />
Rather, the <strong>Law</strong> <strong>Commission</strong>s adopted the procedural solution mapped out in 1980, provisionally<br />
proposing that a warranty of present or existing fact will only be effective if set out as a specific term of<br />
the policy or in an accompanying document. Attempts to convert answers into warranties en bloc,<br />
whether in the proposal form or elsewhere, are to be ineffective, the <strong>Law</strong> <strong>Commission</strong>s proposed.<br />
Because the <strong>Law</strong> <strong>Commission</strong>s took the view 84 that in business insurance their proposed rules would only<br />
be default rules, the parties in business insurance were to be free to agree either that:<br />
(1) the insurer was to have a stipulated remedy or remedies for misrepresentation, even if<br />
the proposer was neither dishonest nor careless in making the representation; or<br />
(2) the insurer could obtain a warranty that statements are correct, affording the insurer a<br />
right to refuse claims even if the insured had acted honestly and carefully. Liability for breach<br />
of warranty of fact should remain strict unless the warranty is not material to the contract and<br />
the warranty cannot be relied upon in relation to a claim for a loss that was in no way<br />
connected to the breach of a warranty.<br />
5.41 The <strong>Law</strong> <strong>Commission</strong>s however suggested that contracting out of these restrictions is to be<br />
possible, that is, the insurer should be free to stipulate that claims in respect of breaches of a nonmaterial<br />
warranty will not be entertained and that the insurer is to be entitled to defend a claim for a loss<br />
even if it is in no way connected with the breach of warranty. 85<br />
(15) The 2009 Report and Draft Bill – Basis of Contract Clauses<br />
5.42 On December 15, 2009, the <strong>Law</strong> <strong>Commission</strong>s published a joint report, Consumer <strong>Insurance</strong><br />
<strong>Law</strong>: Pre-Contract Disclosure and Misrepresentation. 86 The core recommendation in the report was that<br />
basis of contract clauses should be abolished in consumer insurance contracts, or, more specifically, it<br />
should be impossible to use a basis of contract clause so as to convert a misrepresentation into a<br />
contractual right to terminate a consumer insurance contract, by stipulating that such a statement is to be<br />
a warranty.<br />
(16) Warranties in General – United Kingdom Developments<br />
5.43 The <strong>Law</strong> <strong>Reform</strong> Committee, in the 1957 Report, Conditions and Exceptions in <strong>Insurance</strong><br />
Policies 87 was critical of the impact that basis of contract clauses had in elevating all statements, even<br />
statements of fact concerning matters that the proposer may have no knowledge of (such as a preexisting<br />
condition), into a binding promise. The <strong>Law</strong> <strong>Reform</strong> Committee recommended that:<br />
―notwithstanding anything contained in or incorporated in a contract of insurance, no defence to<br />
a claim should be maintainable by reason of any mis-statement of fact by the insured, where<br />
the insured can prove that the statement was true to the best of his knowledge and belief.‖ 88<br />
5.44 The same hostility was not evident in relation to conditions precedent and subsequent. 89<br />
5.45 The examination undertaken in 1979 and 1980 by the <strong>Law</strong> <strong>Commission</strong> squarely addressed<br />
the use of warranties and basis of contract clauses. In relation to warranties the Report drew attention to<br />
the important distinction between warranties of past or present fact and promissory or continuing<br />
warranties, and warranties of opinion. The <strong>Law</strong> <strong>Commission</strong> identified three defects in the existing law on<br />
warranties:<br />
84<br />
85<br />
86<br />
87<br />
88<br />
89<br />
Para. 5.131.<br />
Para. 5.132.<br />
<strong>Law</strong> Com No.319 / Scot <strong>Law</strong> Com No.219 (hereafter, 2009 Report).<br />
Cmnd. 62.<br />
Cmnd. 62, para. 14.<br />
Cmnd. 62, para. 9.<br />
120
(a) ―It seems quite wrong that an insurer should be entitled to demand strict compliance with<br />
a warranty which is not material to the risk and to repudiate the policy for a breach of it.<br />
(b) Similarly, it seems unjust that an insurer should be entitled to reject a claim for any<br />
breach of even a material warranty, no matter how irrelevant the breach may be to the loss.<br />
(c) Material warranties are of such importance to the insured that in our view he ought to be<br />
able to refer to a written document in which they are contained.‖ 90<br />
5.46 The <strong>Law</strong> <strong>Commission</strong> took the view that there should be a modified system of warranties, but<br />
the key recommendation that the <strong>Law</strong> <strong>Commission</strong> made related to both warranties and basis of contract<br />
clauses and was directed at addressing the defect set out at (c) above. The insurer who extracts<br />
warranties from a proposer should be required to furnish the insured with a document containing the<br />
warranties by which the insured is bound, at least as soon as practicable after the warranty has been<br />
given. This should be done in all cases, even where no proposal form is completed (e.g. when the<br />
insurance is concluded over the telephone). Even provisional cover, the <strong>Law</strong> <strong>Commission</strong> recommended,<br />
should be attended by a written statement of the insured‘s warranties, by way of a cover note, the<br />
certificate of insurance, or by letter. Failure to meet this formal requirement should preclude repudiation<br />
of the insurance policy or rejection of a claim.<br />
5.47 Apart from this general obligation to furnish an insured with details of the warranties the<br />
insured has agreed to (surprisingly, nothing was said as to a need to disclose the consequences for the<br />
insured if the insured was not compliant), the <strong>Law</strong> <strong>Commission</strong> went on to suggest other ways in which<br />
the existing law relating to warranties could be modified.<br />
5.48 The first modification involved restricting the freedom of the insurer to demand strict<br />
compliance with warranties that are not material to the risk. The <strong>Law</strong> <strong>Commission</strong> thus suggested the<br />
concept of a material warranty that is, a warranty that a prudent insurer would consider material should<br />
the insurer contemplate accepting the risk or fixing the terms. 91 To sweeten this particular pill for the<br />
industry the <strong>Law</strong> <strong>Commission</strong> suggested that when information is sought from a proposer that is<br />
considered to be capable of being a warranty at common law, a presumption that the information sought<br />
is material should be enacted, the onus resting on the proposer to show that the information sought and<br />
obtained would not have influenced the judgement of the prudent insurer. 92 The <strong>Law</strong> <strong>Commission</strong><br />
considered that this recommendation addressed the first of the defects that they identified (see paragraph<br />
6.9(a) of the Report) in relation to over-broad rights of repudiation being available to an insurer.<br />
5.49 Perhaps the most important modification suggested by the <strong>Law</strong> <strong>Commission</strong> was directed at<br />
the power of an insurer to reject a claim, for breach of a material warranty, even if the warranty breached<br />
could not have contributed to the loss occurring. 93 The <strong>Law</strong> <strong>Commission</strong> had in mind cases where a<br />
motor vehicle was warranted to be roadworthy when it was not, the vehicle being lost by theft rather than<br />
written off following a road accident. A number of examples of this kind were provided by the <strong>Law</strong><br />
<strong>Commission</strong>, the recommendation being that attention should be focused on the type of loss that the<br />
question was directed to and to issues of causation. Thus, the <strong>Law</strong> <strong>Commission</strong> indicated that as long as<br />
the insurer met the formal requirements recommended (i.e. provision of a written statement of warranties<br />
as soon as practicable) ―the insurer should be prima face entitled to reject claims in all cases which occur<br />
after the breach‖. This recommendation was accompanied by two very significant caveats (the nexus<br />
test), related to whether the insured can show either:<br />
―(a) that the broken warranty was intended to reduce (or prevent from increasing) the risk that<br />
a particular type of loss would occur and the loss which in fact occurs is of a different type; or<br />
90<br />
91<br />
92<br />
93<br />
<strong>Law</strong> Com 104, para. 6.9 (footnotes omitted).<br />
<strong>Law</strong> Com 104, para 6.12.<br />
<strong>Law</strong> Com 104, para 6.13.<br />
<strong>Law</strong> Com 104, paras 6.19 and 6.22.<br />
121
(b) that even though the loss was of a type which the broken warranty was intended to make<br />
less likely, the insured‘s breach could not have increased the risk that the loss would occur in<br />
the way in which it did in fact occur.‖ 94<br />
5.50 The effect of the insured being able to make out either or both of these factors would be that<br />
the insured should be able to recover on a claim made. The insurer however should still be able to<br />
repudiate the policy as to the future because, in the view of the <strong>Law</strong> <strong>Commission</strong>, ―insurers should not be<br />
compelled to continue to cover insureds who have committed breaches of warranty.‖ 95 As a<br />
consequence, the <strong>Law</strong> <strong>Commission</strong> further recommended that where an insurer exercised a right to<br />
repudiate a policy, repudiation would be prospective only and that the effective date of repudiation would<br />
be the date when the insurer served a written notice of repudiation. By replacing the idea that a breach of<br />
warranty occurs at the time the statement is made with a requirement to serve a notice of repudiation, this<br />
recommendation provided a degree of clarity while leaving the insurer on risk until the date of repudiation.<br />
A loss arising during the currency of the insurance contract could thus be rejected unless the insured<br />
satisfied either of the nexus tests set out above.<br />
5.51 The English <strong>Law</strong> <strong>Commission</strong> also recommended that an insurer should also be able to reject<br />
a claim for breach of a material warranty without necessarily repudiating the policy in toto: ―It should in our<br />
view be open to insurers to make independent decisions as to whether or not to reject individual claims<br />
and as to whether or not to continue on risk for the remainder of the policy period, without having to make<br />
these decisions in tandem.‖ 96 The <strong>Law</strong> <strong>Commission</strong> believed that this recommendation reflected industry<br />
practice.<br />
(17) Warranties in Consumer <strong>Contracts</strong> in UK <strong>Law</strong> (the 2007 Consultation Paper)<br />
(a)<br />
The First Provisional Recommendation<br />
5.52 The <strong>Law</strong> <strong>Commission</strong> in 1980 recommended that warranties should not be effective unless the<br />
insurer supplied the proposer with a written statement of the warranty before the statement was made, or<br />
as soon as possible thereafter. The <strong>Law</strong> <strong>Commission</strong>s in 2007 reaffirmed this requirement, specifying<br />
that ―writing‖ would include a printed or electronic form. This proposal was one of the few horizontal<br />
proposals in the 2007 Consultation Paper, applying to consumer and business insurance, whether<br />
negotiated or made on standard terms. 97 The extent to which the insurer has met this obligation in<br />
relation to consumer insurance is the subject of a recommendation that the insurer must take sufficient<br />
steps to bring the requirement to the attention of the insurer. Compliance is to be judged by reference to<br />
Financial Services Authority Rules or Guidelines. 98<br />
(b)<br />
The Second Provisional Recommendation<br />
5.53 The issue of causal connection in relation to consumer insurances and warranties is addressed<br />
by the <strong>Law</strong> <strong>Commission</strong>s who favour a causal connection test. In this context, the causal connection test<br />
will place the onus on the insured to show, on the balance of probability, that the event or circumstances<br />
constituting the breach of warranty did not contribute to the loss 99 . Furthermore, in cases where the<br />
breach of warranty was a cause of only part of the loss (the example given is breach of a warranty to<br />
maintain fire sprinklers in a factory, only part of the building being damaged by virtue of breach of the<br />
warranty), the insurer is not to be permitted to refuse to pay for the loss that is unrelated to the breach. 100<br />
These causal connection rules are recommended as mandatory rules in consumer insurance. The <strong>Law</strong><br />
94<br />
95<br />
96<br />
97<br />
98<br />
99<br />
100<br />
<strong>Law</strong> Com 104, para 6.22.<br />
Ibid.<br />
<strong>Law</strong> Com 104, para 6.23.<br />
Para 8.11 and 8.12.<br />
Para 8.19.<br />
Para 8.45.<br />
Para 8.48.<br />
122
<strong>Commission</strong>s also viewed these rules as being applicable to warranties, strictu sensu, that is, exclusions<br />
and temporal restrictions were not to be controlled vis a vis these warranties provisions.<br />
(18) Warranties in Business <strong>Insurance</strong> (the 2007 Consultation Paper)<br />
5.54 The first recommendation is that the insurer will have to provide the business insured with a<br />
written statement detailing the warranties that are binding upon the business insured, either before the<br />
contract is made or as soon as possible thereafter. There is no recommendation as to the amount of<br />
detail the insurer should provide, as there is in relation to consumer insurance. The second<br />
recommendation is that the parties are to be free to vary the effect of breach of warranty by agreement,<br />
but that any such terms must not produce insurance cover that is substantially different from what the<br />
insured reasonably expected. A statutory reasonable expectations test is proposed as a business<br />
insurance counterpart to the ―good faith‖ standard found in the Unfair Contract Terms Directive, which is<br />
of course applicable to consumer insurance only.<br />
(19) The 2009 Report and Draft Bill<br />
5.55 For the moment, the <strong>Law</strong> <strong>Commission</strong>s have left warranties reform to one side. The 2009<br />
Report explains the situation in this way: 101<br />
―Our consultation paper discussed the problems of warranties, which are terms in insurance<br />
contracts that may have particularly draconian consequences. This draft Bill does not reform<br />
the law of warranties, except to abolish ―basis of the contract‖ clauses. The main reason is that<br />
the need for reform is less pressing. Warranties in the strict legal sense are used only rarely in<br />
consumer insurance. And if they are used unfairly, consumers have remedies not only under<br />
the Financial Services Authority (FSA) rules but also under the Unfair Terms in Consumer<br />
<strong>Contracts</strong> Regulations 1999. Furthermore, we think that the law on consumer warranties<br />
should be consistent with the law on business warranties. We have therefore decided against<br />
separate rules on warranties which would apply only in a consumer context.‖ (footnotes<br />
omitted)<br />
(20) New Zealand Legislation<br />
5.56 The position in New Zealand is a relatively straightforward one, the legislative response to precontractual<br />
mis-statements being directed at closing down the right of an insurer to avoid a policy of<br />
insurance for any misstatement unless certain conditions are met. 102 Three situations must be<br />
distinguished.<br />
i) In respect of general insurance, that, is non life policies, there is no right to avoid a policy<br />
only by reason of a statement made in any proposal or other document on the faith of which<br />
the contract was entered into, reinstated or renewed, unless the statement<br />
(a) was substantially incorrect; and<br />
(b) material.<br />
ii) In relation to life policies concluded in such circumstances, there is no right to avoid<br />
unless the statement<br />
(a) was substantially incorrect; and<br />
(b) was material;<br />
(c) was made fraudulently or within three years of either<br />
(i) the date on which the insurer sought to avoid the policy, or<br />
(ii) the date of the death of the life assured,<br />
101<br />
102<br />
Paragraph 1.22 of the 2009 Report.<br />
<strong>Insurance</strong> <strong>Law</strong> <strong>Reform</strong> Act 1977, s.5.<br />
123
whichever is the earlier event. 103<br />
iii) Where however the misstatement is made prior to a life policy being concluded and the<br />
misstatement relates to the age of the life assured, avoidance is not possible and the insurer<br />
must vary the contract by substituting a (presumably lesser) sum than that assured, in<br />
accordance with a proportionality test. 104<br />
5.57 The New Zealand <strong>Law</strong> <strong>Commission</strong>, in its 1998 Report, Some <strong>Insurance</strong> <strong>Law</strong> Problems 105 did<br />
not revisit these provisions in the 1977 legislation, and the 2004 Report, 106 made minor adjustments in<br />
respect of a draft consolidation Bill that are pertinent to warranties insofar as the warranty is regarded as<br />
a misstatement. Proposals for further reform of the law relating to non-disclosure and misrepresentation<br />
are under consideration in the form of the New Zealand Ministry of Economic Development Report,<br />
Review of Financial Products and Providers, 107<br />
(21) Provisional Recommendations<br />
5.58 The <strong>Commission</strong> provisionally recommends that breach of a contractual warranty in an<br />
insurance contract should no longer lead to the contract being avoided from the date of breach, but that,<br />
as in other cases of misrepresentation, the contract should be voidable at the option of the person to<br />
whom the misrepresentation was made (and that, to avoid any doubt, it should be provided that section<br />
33(3) of the Marine <strong>Insurance</strong> Act 1906, which deals with breach of contractual warranty, is confined to<br />
MAT insurance).<br />
5.59 The <strong>Commission</strong> provisionally recommends that, where an insurer is entitled to avoid an<br />
insurance policy claim for breach of warranty, the insurer should also be free to reject the claim without<br />
repudiating the entire insurance policy.<br />
5.60 The <strong>Commission</strong> provisionally recommends that the entitlement of an insurer to avoid a policy<br />
or a claim for breach of warranty should depend on whether the insured was provided at the precontractual<br />
stage, or contemporaneously with the conclusion of the contract, with the information required<br />
by the duty of disclosure (as already defined in this Consultation Paper). The <strong>Commission</strong> provisionally<br />
recommends that, in respect of promissory or continuing warranties that arise after the contract has been<br />
agreed, the insurer must provide the proposer with a clear statement prior to the formulation of the<br />
contract about the scope of the continuing obligations imposed upon the proposer when he or she<br />
becomes the insured. The <strong>Commission</strong> invites submissions on how this requirement may best be<br />
satisfied, particularly when the cover is obtained on-line.<br />
5.61 The <strong>Commission</strong> provisionally recommends that legislation should provide that a breach of<br />
warranty does not arise in respect of matters of past or present fact where the insured can prove that the<br />
statement was true to the best of his or her knowledge or belief.<br />
5.62 The <strong>Commission</strong> provisionally recommends that legislation should provide that statements of<br />
fact or opinion shall not be converted into a contractual warranty by anything stated in the contract, so<br />
that “basis of contract” clauses shall be deemed invalid.<br />
C<br />
Non-Observance of Warranty after Conclusion of Contract<br />
5.63 In this Part, the <strong>Commission</strong> considers the problems that may arise after the contract of<br />
insurance has been concluded and the insurer invokes non observance of a warranty so as to avoid the<br />
contract. In Part B, the <strong>Commission</strong> focused on warranties of past and existing fact, misrepresentation<br />
103<br />
104<br />
105<br />
106<br />
107<br />
<strong>Insurance</strong> <strong>Law</strong> <strong>Reform</strong> Act 1977, s.4.<br />
<strong>Insurance</strong> <strong>Law</strong> <strong>Reform</strong> Act 1977, s.5. Schedule C to NZLCR 87, Life Assurance proposed a statutory formula<br />
based on the 1984 Australian model.<br />
NZLCR 46, Life Assurance: See Campbell, <strong>Insurance</strong> [1999] NZLR 191.<br />
NZLCR 87.<br />
September 2006 (ISBN 978-0478-30414-5).<br />
124
and the consequences that follow on from an insurer seeking to acquire broader rights to avoid a policy<br />
by way of basis of contract clauses.<br />
5.64 In this Part, the <strong>Commission</strong> considers three issues that arise generally after the loss has<br />
materialised. Firstly, the existing law does not require the insurer to show that a promissory warranty as<br />
to the future was either material to the cause or a contributory factor to the loss. The <strong>Commission</strong><br />
considers whether the law should continue to reflect this position. Secondly, in the event that the law<br />
needs to be changed, the <strong>Commission</strong> considers whether a solution could be provided by Articles 4:102<br />
and 4:103 of the Principles of European <strong>Insurance</strong> Contract <strong>Law</strong> (PEICL). Thirdly, the <strong>Commission</strong><br />
explores the relationship between promissory warranties and exclusions in insurance contract law. In<br />
each of these three sections it will be seen that judicial activism has taken some of the sting out of these<br />
promissory warranties and exclusions but the <strong>Commission</strong> puts forward some possible legislative<br />
amendments that might make the law clearer and fairer, meeting the reasonable and commercial<br />
expectations of Irish insureds.<br />
(1) Warranties and Causation<br />
5.65 An insurer may seek to limit cover to a number of possible contingencies or seek to exclude<br />
from cover a range of eventualities by way of exclusion clauses. Restrictions of this kind are<br />
understandable and acceptable where the circumstances in question may extend the scope of the risk, as<br />
long as the restrictions are transparent and are reflected in the premium charged. However, where the<br />
restriction takes the form of a promissory warranty, there is a danger that individual insurers might be<br />
tempted to repudiate liability, even when there is no causal link between the loss that has occurred in a<br />
given case and the risk referred to in the policy.<br />
5.66 In some cases an insurer will take statistical or actuarial evidence that certain kinds of insureds<br />
or activities, or geographical locations, might lead to increases in risk; inexperienced drivers, specific<br />
winter sports activities or politically volatile holiday destinations may be the subject of exclusions or<br />
restrictions in relevant insurance policies; the use of motor vehicles for business or commercial purposes,<br />
as distinct from private use, affords an example. In Jones v Welsh <strong>Insurance</strong> Corporation 108 a motor<br />
policy restricted cover to business use of the insured qua his trade as a motor mechanic. The insured<br />
was also a part-time farmer. An accident occurred when the insured‘s brother was driving the vehicle and<br />
transporting two sheep and two lambs to grazing. The restrictions on cover meant that the loss was not<br />
recoverable. In Kelleher v Cristopherson 109 the claimant was a labourer who used his car to drive to and<br />
from his work at Haulbowline. The claimant kept a few pigs and regularly obtained pig swill from the<br />
canteen at his workplace, transporting the swill in his car. An accident occurred whilst transporting the<br />
pig swill on the claimant‘s returning from work. Judge Neylon took the view that the claimant was<br />
engaged in pig farming by way of a hobby or amusement, rather than by way of a business, distinguishing<br />
the decision in Jones on the basis that, in Jones, the insured was not driving the vehicle at the time of the<br />
accident and the business activity being undertaken was outside the insurance. In the instant case the<br />
fact that the insured was transporting swill was irrelevant. Judge Neylon continued:<br />
I cannot accept the proposition that by carrying swill he thereby converted a journey which was<br />
covered by insurance into one which was not so covered. It appears to me that when a person<br />
is using his car for a purpose which is apparently covered by his policy of insurance, there is a<br />
very heavy onus on the insurance company to discharge before it can establish that such a<br />
user has ceased to be insured by reason of some action of the insured. As in this case, it is a<br />
fact that the insured was returning home from work and thus is covered by insurance. To<br />
deprive him of this benefit it must be proved that he has done something which alters the<br />
nature of the journey or user of the car. 110<br />
108<br />
109<br />
110<br />
[1937] 4 All ER 149.<br />
(1957) 91 ILTR 191.<br />
(1957) 91 ILTR 191, at 195.<br />
125
5.67 Nevertheless, the law reports are full of cases 111 where common law courts allow an insurer to<br />
rely either on an object clause, or an exception, to refuse to honour a policy in circumstances where an<br />
event or omission occurred, having no causal link with the accident. The <strong>Law</strong> <strong>Commission</strong> of England<br />
and Wales and the <strong>Law</strong> <strong>Commission</strong>s, have repeatedly cited decisions that dictate that promissory<br />
warranties, when breached, give the insurer ―the right to repudiate the whole contract from the date of the<br />
breach regardless of the materiality of the term, the state of the mind of the insured, or the connection<br />
between the breach and the loss.‖ 112 This situation is made even more difficult by virtue of the fact that<br />
promissory warranties may be imputed relatively easily if the promise itself speaks to the future and it is<br />
clear that the only real purpose that the warranty could have would be to commit the insured to meet the<br />
terms of the stipulation on a continuing basis. Although there are some cases where the Irish courts<br />
have read a promissory statement as having no such effect, 113 the weight of Irish case-law in relation to<br />
conditions precedent as importing future obligations tend to favour the insurer. 114<br />
5.68 The first meaningful analysis of this situation took place in New Zealand. The <strong>Contracts</strong> and<br />
Commercial <strong>Law</strong> <strong>Reform</strong> Committee 115 critically examined two New Zealand decisions that allowed an<br />
insurer to avoid liability when promissory warranties were held to have a temporal element (ie cover not<br />
available whilst certain facts existed).<br />
5.69 This New Zealand case-law concerned accidents involving motor vehicles being driven whilst<br />
in an unsafe condition (eg bald tyres). 116 The fact that the vehicle was being driven at a time when the<br />
condition itself would not have caused the accident was held in these cases not to disentitle the insurer<br />
from repudiating the policy. In Parsons v Falmers Mutual <strong>Insurance</strong> Association 117 an exclusion from<br />
cover of a driver ―whilst intoxicated‖ became relevant after the insured was killed outright when the<br />
vehicle he was driving struck a bridge. The insured‘s intoxicated condition was not in issue but there was<br />
scant evidence that the degree of impairment contributed to the accident. Nevertheless, the New<br />
Zealand Court of Appeal held that the exclusion whilst intoxicated:<br />
―gave an insurance company a broad means of relieving the company from liability, the<br />
underlying consideration being that he who is intoxicated is far more likely to suffer bodily injury<br />
by accident than he who is sober. It is clear that the word ―whilst‖ does not import a causative<br />
relationship between the state of intoxication and the happening of the event amounting to<br />
accident.‖ 118<br />
5.70 Section 11 of the <strong>Insurance</strong> Act 1977 accordingly introduced a mechanism whereby the<br />
insured could recover upon proving, on the balance of probability that the loss was not caused or<br />
111<br />
112<br />
113<br />
114<br />
115<br />
116<br />
117<br />
118<br />
See MacGillivray, para. 10-040. The causal connection requirement in Civilian systems for precautionary<br />
measures is discussed in the ‗mixed‘ South African system by Van Niekerk at (2010) 22 Sa Merc LJ 259,<br />
arguing that judicial endorsement of the Civil law approach can be found in earlier Roman-Dutch law decisions<br />
and that a modern South African court should act ―to put the matter beyond doubt‖ (p.271).<br />
Eg <strong>Law</strong> <strong>Commission</strong> Working Paper No. 73, para. 99, citing inter alia Pawson v Watson (1778) 2 Comp 785,<br />
587; De Hahn v Hartley (1786) 1 T.R. 343.<br />
Eg Gorman v The Hand in Hand <strong>Insurance</strong> Co (1877) IR 11 CL 224; Weir v Northern Counties of England<br />
<strong>Insurance</strong> Co (1879) 4 LR Ir 689.<br />
Gamble v Accident Assurance Co Ltd (1869) IR 4 CL; Patton v Employers‟ Liability <strong>Insurance</strong> Corp (1887) 20<br />
LR Ir 689; Re the Equitable <strong>Insurance</strong> Co Ltd [1970] IR 45. Note that the Supreme Court, in Capmel Ltd v<br />
Lister (No.1) [1989] IR 319 dismissed an appeal from Costello J holding for an insured on the basis that the<br />
onus lay on the insurer to draft a condition precedent in such a way as to have the desired result.<br />
Reporting in 1975.<br />
State <strong>Insurance</strong> General Manager v Harray [1973] 1 NZLR 276; Yaxley v New Zealand <strong>Insurance</strong> Co Ltd<br />
[1973] 2 NZLR 231.<br />
[1972] NZLR 966.<br />
[1972] NZLR 966 at 976, (MacArthur J), citing Public Trustee v NIMU <strong>Insurance</strong> Co [1967] NZLR 530 and<br />
Abraham v Norwich Union Fire <strong>Insurance</strong> Society Ltd [1970] NZLR 968.<br />
126
contributed to by non observance of the restriction found in the policy. 119 The 1977 reform in New<br />
Zealand has been thought to have gone too far in favour of the insured. In New Zealand <strong>Insurance</strong> Co<br />
Ltd v Harris 120 the New Zealand Court of Appeal allowed an insured (who had breached a warranty by<br />
hiring out a tractor, the tractor being destroyed by fire) to benefit from the provisions of section 11. A<br />
strong New Zealand Court of Appeal (Richardson, Bisson and Hardie Boys JJ) observed of section 11<br />
that it was intended to counteract the practice by insurers of putting temporal, not causative exemption<br />
clauses into insurance contracts: Richardson J wrote:<br />
―Section 11 contemplates a two step inquiry where the contract of insurance excludes or limits<br />
the insurer‘s liability on the happening of certain events or the existence of certain<br />
circumstances. The first is to determine whether the insurer‘s liability has been so defined<br />
because the happening of the events or the existence of the circumstances was in the view of<br />
the insurer likely to increase the risk of occurrence of the loss. That inquiry rests on an<br />
assessment of the bona fide view of the insurer in relation to the matter.<br />
Even where the purpose of the limitation is entirely legitimate the insured is not necessarily<br />
disentitled to be indemnified. That is for consideration at the second step. The inquiry there is<br />
whether the loss in respect or which the insured seeks to be indemnified was caused of<br />
contributed to by the happening of the events or the existence of the circumstances was in the<br />
view of the insurer likely to increase the risk of occurance of the loss. The onus of proof rests<br />
on the insured and the answer turns on the objective assessment of the Court or Arbitrator, not<br />
on the subjective views of the insurer. There is then a presumption of a causal link between<br />
the relevant events or circumstances and the particular loss.‖ 121<br />
5.71 The trial judge found the condition in the policy was intended to ensure that insured persons<br />
retain control over the vehicle and reflect the appropriate premium to be charged in respect of hiring out.<br />
After finding that the contract did not require the tractor to be kept under cover or at a particular location,<br />
and that the insured had not breached a separate warranty to take all reasonable steps to safeguard the<br />
vehicle, the Court of Appeal upheld the trial judge‘s decision that breach of the warranty did not cause or<br />
contribute to the loss. As there was an accepted practice of leaving tractors in open fields, as occurred<br />
here, there was no causal link between the breach of promise and the loss. This decision, and others, 122<br />
was regarded by the New Zealand <strong>Law</strong> <strong>Commission</strong> as unfair:<br />
―The underwriter‘s art is (theoretically at least) that of determining whether to accept a risk and<br />
on what terms, having regard to the likelihood of the loss occurring. The problem with s 11 as<br />
it has been interpreted is that it takes no account of the extent to which an exclusion may be<br />
framed with that statistical likelihood in mind. It is reasonable, for example, for an insurer to<br />
charge different rates of premium for vehicles used commercially and vehicles used privately<br />
because of the greater risk of accident (eg. A taxicab is more likely to be involved in an<br />
accident than the same vehicle confined to private use.) But s 11 has been interpreted in a<br />
way that prevents insurers from declining liability to indemnify for losses to equipment during<br />
commercial use when the cover by its terms is confined to private use: New Zealand <strong>Insurance</strong><br />
Company Ltd. v Harris [1990] 1 NZLR 10. It has also been interpreted in a situation where the<br />
insured paid a lesser premium in return for motor vehicle cover on the basis that it was<br />
confined to a named driver but the insurer was required to indemnify for loss caused when the<br />
vehicle was in the control of a different driver: State <strong>Insurance</strong> Ltd v Lam (unreported, 10<br />
October 1996, CA 159/96).‖ 123<br />
5.72 The solution identified by the New Zealand <strong>Law</strong> <strong>Commission</strong> was to create an amendment to<br />
section 11 in the form of a subsection that excludes s 11 operating on certain risk factors that an insurer<br />
119<br />
120<br />
121<br />
122<br />
123<br />
See ALRC Report 20, para. 233 for comments on the genesis of the 1977 New Zealand provision.<br />
[1990] 1 NZLR 10.<br />
Ibid, p.15.<br />
Report No. 46 Some <strong>Insurance</strong> Problems (May 1998).<br />
Report No. 46 Some <strong>Insurance</strong> Problems (May 1998).<br />
127
may properly consider to be relevant in deciding to underwrite the proposal. Motor insurance and<br />
property insurance is often underwritten on the basis of the age, identity, qualifications or experience of a<br />
driver, a geographical area within which the loss must, or must not, occur, or the restriction of use to non<br />
commercial use. While the proposed amendment to section 11 of the <strong>Insurance</strong> <strong>Law</strong> <strong>Reform</strong> Act 1977<br />
has not yet been enacted, it suggests (as the <strong>Law</strong> <strong>Commission</strong>s themselves said in the 2007<br />
Consultation Paper) a focused and practical answer to a difficult problem of causation.<br />
5.73 The proposed section 11 reads:<br />
(1) An insured is not bound by an increased risk exclusion if the insured proves on the<br />
balance of probability that the loss in respect of which the insured seeks to be indemnified<br />
was not caused or contributed to by the happening of an event or the existence of a<br />
circumstance referred to in the increased risk exclusion.<br />
(2) For the purposes of this section, an increased risk exclusion is a provision in a contract of<br />
insurance that<br />
(a) defines the circumstances in which the insurer is bound to indemnify the insured<br />
against loss so as to exclude or limit the liability of the insurer to indemnify the<br />
insured on the happening of certain events or on the existence of certain<br />
circumstances; and<br />
(b) so defined the liability of the insurer, in the view of the court of arbitrator determining<br />
the claim of the insured, because the happening of such events or the existence of<br />
such circumstances was in the view of the insurer likely to increase the risk of loss<br />
occurring.<br />
(3) A provision is not an increased risk exclusion for the purposes of this section that<br />
(a) defines the age, identity, qualifications or experience of a driver of a vehicle, a pilot of<br />
an aircraft, or an operator of a chattel; or<br />
(b) defines the geographical area in which a loss must occur if the insurer is to be liable<br />
to indemnify the insured; or<br />
(c) excludes loss that occurs while a vehicle, aircraft, or other chattel is being used for<br />
commercial purposes other than those permitted by the contract of insurance.<br />
5.74 The New Zealand <strong>Law</strong> <strong>Commission</strong> itself suggested that a broader solution would be possible,<br />
via a definition of a contractual provision, which is not an increased risk exclusion, if based on ―actuarial<br />
or statistical data establishing an increased risk of loss‖: this option was discounted on the basis that such<br />
a provision would ―wipe out the original [s.11] reform‖. Nor did the New Zealand <strong>Law</strong> <strong>Commission</strong> favour<br />
the adoption of the Australian response, section 54 of the <strong>Insurance</strong> <strong>Contracts</strong> Act 1984. The New<br />
Zealand <strong>Law</strong> <strong>Commission</strong> regarded the Australian provision as being, in general, ―sweeping and<br />
unfocused‖, out of sympathy with the habits of insurers and insurance law practitioners, likely to provoke<br />
litigation and, ultimately, unlikely to prove judge-proof. Even supporters of s.54 – and it is fair to say that<br />
Professor Merkin for example found much to praise in that section – regard it as difficult. 124 Even the<br />
reforms of The Australian Treasury Review in the form of the <strong>Insurance</strong> <strong>Contracts</strong> Bill 2010 directed at<br />
much broader issues than the causation problem in warranties/exemptions as to the future, may not<br />
resolve the section 54 problem. It should also be noted that Australian consumer law, unlike Irish<br />
consumer law is currently defective in providing specific protection for consumers; in sum, the<br />
<strong>Commission</strong> believe that a section, 54 provision would not be a satisfactory basis upon which to form an<br />
Irish legislative solution to the problem at hand.<br />
5.75 The <strong>Law</strong> <strong>Commission</strong>s, in their 2007 Consultation Paper, reached much the same kind of<br />
conclusion over section 54. While the New Zealand 1977 provision and the proposed amendment would<br />
continue to deal with the situations that prompted the reform in the first place, eg an intoxicated driver<br />
should be able to recover for damage to the drivers vehicle when struck from behind by another vehicle<br />
124<br />
Merkin, ―<strong>Reform</strong>ing <strong>Insurance</strong> <strong>Law</strong>: is there a case for Reverse Transportation?‖<br />
128
whilst stopped at traffic lights, 125 as should the unfortunate driver of a vehicle damaged by a falling tree,<br />
the vehicle being in an unroadworthy condition, 126 the <strong>Law</strong> <strong>Commission</strong>s felt that there should be<br />
limitations on a causal connection test:<br />
The causal connection test should not apply, for example, where a motor policy specified that<br />
drivers must be aged 30 or over, and the vehicle was driven by a 20 year old. The insurer<br />
should be entitled to refuse the claim, even if the accident was caused by someone else‘s fault.<br />
Similarly, if a marine insurance contract any loss that took place in the Gulf, even if the location<br />
did not cause the loss. The same should apply if a car insured for private use is being used<br />
full-time as a taxi. There comes a point where the activity generating the loss is so far<br />
removed from the activity covered by the policy that the policy should not apply at all. 127<br />
5.76 The <strong>Law</strong> <strong>Commission</strong>s have since however retreated somewhat from the New Zealand<br />
approach, favouring a causal connection test that is confined to warranties. The New Zealand approach<br />
was criticised on the basis that the proposed new section 11(3) list was arbitrary, applying to a ship<br />
excluding cover whilst in the English Channel but not where an insurer specified that the ship should<br />
retain its classification. 128<br />
5.77 Notwithstanding the force of these points, the <strong>Commission</strong> sees the New Zealand solution as<br />
having considerable attractiveness. The <strong>Commission</strong> believe that it is relatively easier to understand than<br />
the Australian provision, as well as the England and Wales proposed text from 1980, and the proposed<br />
causal connection test in the 2007 Joint Consultation Paper. The <strong>Commission</strong> believe that section 11<br />
strikes a reasonable balance insofar as the insured is required to prove that the event did not cause or<br />
contribute to the event (explicable in terms of the New Zealand case-law prior to 1977). On the issue of<br />
arbitrariness the <strong>Commission</strong> recognises that the closed list in the proposed section 11(3) has this<br />
disadvantage, but the <strong>Commission</strong> does not see this as an insuperable obstacle and it represents a<br />
considerable imporvement on existing Irish law and the original section 11 solution in the New Zealand<br />
1977 Statute.<br />
5.78 For example, a general ―catch-all‖ provision could be added: 129 a system of delegated<br />
legislation could be put in place to narrow or broaden these exceptions, as the case may be. The<br />
continued use of conditions precedent in business to business insurance contracts which stand outside<br />
the existing 2005 limit on the extended definition of consumer insurance could be effective. Indeed,<br />
section 11 of the New Zealand provision, and this suggested amendment, could be a default provision for<br />
such business insurance contracts: it has been said by Lord Justice Aitkins that the <strong>Law</strong> <strong>Commission</strong>s<br />
have not stated that professional insurers and their commercial clients agree that ―the law on warranties<br />
is out of line with the reasonable expectations of both sides – in insurer and assured – or even those of<br />
the assureds alone.‖ 130 Lord Justice Aitkins went on to argue against assimilating the positions of all<br />
proposers into one paradigm:<br />
125<br />
126<br />
127<br />
128<br />
129<br />
130<br />
A New Zealand Contract and Commercial <strong>Law</strong> <strong>Reform</strong> Committee (1975) example.<br />
<strong>Law</strong> <strong>Commission</strong>s Joint Consultation Paper, para. 8.33.<br />
Joint Consultation Paper, para. 8.35.<br />
Joint Consultation Paper, 8.37. The ALRC made the same comment, noting that the original 1977 provision<br />
was aimed at exempting provisions rather than warranties. In South African <strong>Law</strong>, the Long-term <strong>Insurance</strong> Act<br />
(No.52) of 1998, section 59, and the Short-term <strong>Insurance</strong> Act (No.53) of the same year require<br />
representations of past and present fact to be material, even if the contract converts such representations into<br />
warranties. Promissory warranties on the other hand, as contractual promises as to the future, must be met.<br />
Giving the insured the opportunity to discharge the onus of proof. On balance however the <strong>Commission</strong><br />
believes it will be better to enact the proposed section 11 New Zealand amendment without further<br />
modification.<br />
The <strong>Law</strong> <strong>Commission</strong>s‘ Proposed <strong>Reform</strong>s of the <strong>Law</strong> of ―Warranties‖ page 117, in Soyer, <strong>Reform</strong>ing Marine<br />
and Commercial <strong>Insurance</strong> <strong>Law</strong>, at p.117.<br />
129
―It is easy to sympathise with the consumer assured who has made an innocent error in<br />
making a statement about an existing or past fact in a proposal, who then forgets about it all<br />
and thinks he is insured and then suffers a loss which is not paid because the fact was not true<br />
and it is treated as a ―warranty‖. But I must admit to having less sympathy for the business<br />
assured, who, in his own business, may well demand exact compliance with contract terms<br />
with its counterparty, whether it be as to description of goods, date of shipment or the<br />
documents to be produced to entitle payment on a letter of credit. If business people wish to<br />
insure the wherewithal of their businesses, can it not be said that they ought to make<br />
themselves as aware of the consequences of their actions (or inactions) as they would do for<br />
their own speciality? That was how the rule as to breach of warranties was defended when it<br />
was first introduced and one asks whether businesses are, generally speaking, less robust now<br />
than they were in 1980.‖ 131<br />
5.79 The <strong>Commission</strong> provisionally recommends that where the insured establishes that there is no<br />
causal link between the failure to observe a promissory warranty and the loss the insured should be able<br />
to recover on the claim; and the <strong>Commission</strong> invites submissions as to whether the failure to observe a<br />
promissory warranty will only lead to the contract being invalidated where the insured has acted<br />
fraudulently (intentionally or recklessly). This provisional recommendation should apply to all insurance<br />
contracts within the terms of the Financial Services Ombudsman jurisdiction, even if the dispute comes<br />
before the courts. In relation to other insurance contracts the <strong>Commission</strong> invites submissions on<br />
whether a provision of this kind should serve as a default rule in commercial insurance contracts<br />
generally.<br />
(2) Precautionary Measures under the PEICL and Promissory Warranties<br />
5.80 The decision in Bennett v Axa <strong>Insurance</strong> Plc 132 suggests that individual insurers may be<br />
prepared to allow a policy to require that promissory conditions should be linked to the events that<br />
occasioned the loss. The case also shows that promissory warranties can remain draconian in their<br />
consequences. A pizza restaurant covered by an all risks policy was destroyed by fire after closing one<br />
evening. The insurer sought to avoid the claim by relying on a ―waste clause‖ whereby the insured<br />
warranted that ―trade waste‖ would be removed from the premises at the end of each days trading. Some<br />
materials, including cigarette butts and paper napkins, were, the court found, likely to have been left in<br />
metal bins and thus created the source of the fire. The insurer did not rely upon a clause requiring the<br />
insured to take reasonable precautions to prevent the loss (apparently conceding any defence centring on<br />
negligence would fail), and even though the policy behind the waste clause:<br />
―could perhaps be more clearly advertised or enunciated, the waste clause was effective. In a<br />
plea ad misericordiam in his final reply [the claimant‘s counsel], suggested that the Claimant<br />
had complied with the spirit of the policy, although he was in fact unaware of the existence of<br />
the warranty, that the Defendant underwriters were relying upon a technicality and that it was<br />
unjust that someone who was as the Claimant was running a tight ship should in such<br />
circumstances be denied an indemnity by his underwriters. The plea serves only to<br />
demonstrate how uncertain a guide is sentiment in determining a claim of the sort which is<br />
before me. Naturally I have great sympathy for the Claimant, an honest businessman who<br />
finds himself without insurance cover notwithstanding his evidence as to the measures he took<br />
to put into place a proper system designed to ensure the tidiness and cleanliness of the<br />
premises was unchallenged. That is no doubt why the insurers did not suggest that the<br />
insured had failed to take reasonable precautions to prevent the loss and damage which in fact<br />
occurred. Sympathy for a large corporate insurer is less obviously felt, but by inclusion of the<br />
waste clause in their policy these insurers made clear that payment of a claim in circumstances<br />
such as I have been compelled to find here existed was not the bargain which they made.<br />
Warranties in an insurance policy are draconian in their effect … It is not altogether surprising<br />
131<br />
132<br />
Ibid p.118.<br />
[2003] EWHC 86 (Comm).<br />
130
that non-compliance with a warranty as to the existence and content of which both the insured<br />
and this staff were in ignorance should lead to failure of a claim.‖ 133<br />
5.81 In contrast, the precautionary measures provisions in the PEICL, Article 4:102, if applied to this<br />
case, would produce a different result. The precautionary measures provisions in the PEICL are heavily<br />
influenced by the shape of general European insurance law and practice. The strict and inflexible nature<br />
of the promissory warranty is reflected in the Marine <strong>Insurance</strong> Act 1906, section 34 of which defines a<br />
promissory warranty as promises by which ―the insured undertakes that some particular thing will or will<br />
not be done or that some condition will be fulfilled.‖ The Act also provides that a breach of warranty<br />
results in the automatic discharge of the insurer from liability of the insurer 134 unless the insurer waives<br />
the breach of a promissory warranty, thus creating an estoppel to the extent that the insurer cannot rely<br />
upon the breach as having discharged the insurer form liability. 135<br />
5.82 In contrast, Article 4:102 PEICL provides:<br />
(1) A clause which provides that in the event of non-compliance with a precautionary<br />
measure the insurer shall be entitled to terminate the contract, shall be without effect<br />
unless the policyholder or the insured has breached its obligation with intent to cause the<br />
loss or recklessly and with knowledge that the loss would probably result.<br />
(2) The right to terminate shall be exercised by written notice to the policyholder within one<br />
month of the time when the non-compliance with a precautionary measure becomes<br />
known or apparent to the insurer. Cover shall come to an end at the time of termination.<br />
136<br />
Article 4:102 is intended to limit the insurers right to decline to pay out on a claim when the obligation<br />
breached is a condition precedent to liability, that is, breach of a promissory warranty, 137 unless the<br />
breach occurred ―with intent to cause the loss or recklessly and with knowledge that the loss would<br />
probably result.‖ Irish law already allows recovery even if the insured acts with carelessness, negligence<br />
and improper conduct. 138<br />
5.83 While this provision would reverse the decision in Bennett v Axa <strong>Insurance</strong> Plc, a hard case,<br />
the scope of Article 4:102 to a common lawyer appears at first to be overreaching. Article 4:102 qualifies<br />
the bargain and requires an underwriter to meet a claim the underwriter did not undertake to meet; Article<br />
4:102 sets a standard of performance for the policyholder insured that falls short of strict liability; the claim<br />
will be successful even if the policyholder/insured was negligent. But codes of practice in Ireland and the<br />
United Kingdom direct that claims should not be rejected unreasonably, save where there is evidence of<br />
fraud. In cases of breach of warranty or condition, rejection of a claim per se is not good insurance<br />
practice. Unless the circumstances of the claim are connected to the breach, reliance on breach of a<br />
promissory warranty is not industry practice, at least not amongst responsible insurers. The adoption of<br />
Article 4:102 would not necessarily deny an insurer the promissory warranty where fraud was suspected,<br />
but even in such a case the provisions in Article 4:102(1) seem to accord with the various Ombudsman‘s<br />
133<br />
134<br />
135<br />
136<br />
137<br />
138<br />
Ibid para 22.<br />
Marine <strong>Insurance</strong> Act 1906, s.33(3) effective from the date of the breach. This is representative of the entire<br />
law of insurance: The Good Luck [1992] 1 AC 233; Global Press Systems Inc v Berhad [2011] UKSC 5, per<br />
Lord Mance at para. 56.<br />
Section 34(3): see Lord Goff in The Good Luck [1992] 1 AC 233 at 262-3; see also J Kirkaldy and Sons v<br />
Walker [1999] Lloyds Rep IR 410 and Kosmar Villa Holidays Plc v Trustees of Syndicate 1243 [2008] Bus L.R.<br />
931.<br />
Defined in Article 4:101 as ―clause in the insurance contract, whether or not described as a condition<br />
precedent to the liability of the insurer, requiring the policyholder or the insured, before the insured event<br />
occurs, to perform or not perform certain acts.<br />
See Lord Goff in The Good Luck[1992] 1 AC 233 at 263.<br />
Jameson v Royal <strong>Insurance</strong> Company (1873) IR 7 CL 126.<br />
131
decisions, and case-law, that prevent an insurer from being judge and jury in relation to allegations on<br />
criminal misconduct. 139<br />
5.84 There may still be room to consider whether Article 4:102 goes further than is necessary or<br />
desirable. Promissory warranties may serve important social objectives in the sense that proscriptive<br />
rules concerning security measures (for example, in property insurance) might deter burglaries (and even<br />
crimes of violence). Should an insurer be able to contract for precautionary measures to be observed,<br />
even if the contractual standard is one of reasonable care, rather, than intention, or recklessness, as set<br />
by Article 4:102?<br />
(3) The Causation Problem and Promissory Warranties – Article 4:103<br />
5.85 Because the PEICL does not envisage the possibility that breach of a promissory warranty will<br />
either automatically entitle the insurer to avoid liability for loss that has arisen, nor terminate the contract,<br />
per se, any clause that seeks to contractually secure either of these rights will have to satisfy Article<br />
4:102. Article 4:102 does not address the causation problem, while Article 4:103 does. Headed<br />
―Discharge of the Insurer‘s Liability‖, it follows the same structure as Article 4:102:<br />
(1) A clause that non-compliance with a precautionary measure totally or partially exempts<br />
the insurer from liability, shall only have effect to the extent that the loss was caused by<br />
the non-compliance of the policyholder or insured with intent to cause the loss or<br />
recklessly and with knowledge that the loss would probably result.<br />
(2) Subject to a clear clause providing for reduction of the insurance money according to the<br />
degree of fault, the policyholder or insured, as the case may be, shall be entitled to<br />
insurance money in respect of any loss caused by negligent non-compliance with a<br />
precautionary measure.<br />
5.86 Article 4:102 deals with the problem outlined by the <strong>Law</strong> <strong>Commission</strong>s in their 2007<br />
Consultation Paper (ie a fire sprinkler that is out of operation despite a warranty to maintain is the basis<br />
upon which a claim for flood damage is rejected). The breach of the promissory warranty to maintain is<br />
simply irrelevant. The comments to Article 4:103 show that this provision is intended to go much further:<br />
―Non-compliance with a requirement of a sprinkler in full operation in a fire policy therefore may<br />
have the effect of excluding the insurer‘s liability for loss caused by fire if the loss would have<br />
been avoided by a fully operating sprinkler. In addition, the insurer‘s liability may be reduced if<br />
the loss caused by fire could not have been fully avoided by an operating sprinkler (for<br />
example in case of lightning) but has only increased due to the absence of such a sprinkler. In<br />
that case the insurer‘s liability would only be reduced as far as the non-compliance contributed<br />
to the extent of the loss. The onus of proving the prerequisites for a discharge of the insurer‘s<br />
liability, including a causal link between non-compliance and loss, is on the insurer.‖ 140<br />
5.87 The facts of he Bennett case, discussed earlier, tease out an interesting aspect of Article<br />
4:103(2). There, the fire was caused by non-compliance with a waste materials clause that essentially<br />
involved strict liability. The insured was not alleged to have been negligent in taking reasonable<br />
precautions to avoid the loss from occurring (a distinct obligation separate from the waste clause<br />
requiring removal of waste materials from the premises). The causation link was thus established by the<br />
insurer. But in the case of the fault element, it is likely that a court would not have found the insured to<br />
have been negligent. Even careful insureds are to be expected to find that accidents happen. The<br />
authors of the PEICL argue that the ‗basic‘ philosophy is that insurance is taken out not just for accidental<br />
risks but also for cases or negligent behaviour.‖ 141 The authors of the PEICL go on to state that if a<br />
clause is intended to limit the insurer‘s liability to compensate for a loss that is caused negligently (as<br />
139<br />
140<br />
141<br />
Eg Gray v Hibernian <strong>Insurance</strong> Unreported, H.C. May 27, 1993; Financial Services Ombudsman Decision of<br />
July – December 2006, p.8.<br />
PEICL, p.176.<br />
Irish law contains a similar observation: Jameson v The Royal <strong>Insurance</strong> Co (1873) IR 7 CL 126.<br />
132
district from purely accidental loss) the transparency provisions in Article 1:203 142 must be met. After<br />
speaking to Article 1:203 the authors state that the:<br />
―additional requirement that it has to be clear indicates that it must be in a very specific<br />
language in order to discharge the insurer in cases of negligence. If such a clause is applied in<br />
a specific case the discharge of the insurer from liability is limited by the degree of causation<br />
(Article 4:103 para. 1) and additionally by the degree of fault. If the fault is very slight there is<br />
no discharge, if the degree of fault comes close to recklessness the discharge may be almost<br />
complete.‖ 143<br />
5.88 The problem that the <strong>Commission</strong> has with the decision in Bennett revolves around the fact<br />
that the insured seems to have been entirely innocent of any fault, there was no imputation of fraud, the<br />
clause was not clearly set out, and it was given a broad application by the Court. If the policy was<br />
intended to create a strict duty to remove all waste material from the premises at the end of each trading<br />
day, or fire cover would be rendered invalid, perhaps the warranty should have said as much. It is<br />
submitted that the general approach to constriction of ambiguous terms in an insurance policy, and a<br />
desire to avoid literalism is best summed up in Pratt v Aigaion <strong>Insurance</strong> Company SA. 144 Here, a clause<br />
requiring a fishing vessel to be manned ―at all times‖ was not met and the claim initially failed. However,<br />
the English Court of Appeal indicated that a court could move some distance from a literal application (eg<br />
in cases of emergency on board the vessel in this case) but it could not overturn the bargain. The Court<br />
of Appeal however read the clause in a purposive sense and viewed it as being aimed at loss caused by<br />
fire whilst tied up in port.<br />
(4) Discussion on unfair terms and the relationship with promissory warranties<br />
5.89 While the <strong>Law</strong> <strong>Commission</strong>s appear to be very bullish about the effectiveness of the Unfair<br />
Contract Terms Directive in counteracting standard terms that might be unclear in terms of meaning and<br />
scope, 145 or may not have been brought to the attention of proposers/insureds, as disclaimers and<br />
warranties, the paucity of case-law 146 on the Directive in the context of insurance contracts means that<br />
such a perspective is largely untested. As between small business proposers and insurers the Unfair<br />
Contract Terms Directive has no application although it is possible that the Financial Services<br />
Ombudsman could use the Directive when a business insured‘s complaint falls within the jurisdiction of he<br />
Financial Services Ombudsman. The <strong>Commission</strong> considers that the <strong>Law</strong> <strong>Commission</strong>s arguments are<br />
persuasive within the context of consumer insurance and that the emphasis that can and should be<br />
placed upon procedural transparency goes some considerable way towards counteracting unfair and<br />
abusive contractual practices, as do other measures such as restricting avoidance of the policy as the<br />
primary remedy, discussed elsewhere. At this juncture the <strong>Commission</strong> considers that the Directive, as<br />
adjusted by way of Article 2:304 of the PEICL to deal with unfair contract terms in insurance contracts, is<br />
a sound and incremental development and the <strong>Commission</strong> has provisionally concluded that a variation<br />
of Article 2:304 should be adopted into Irish law.<br />
5.90 The question of how best to provide protection to business proposers and insureds however is<br />
extremely problematical. The <strong>Commission</strong> has considered the PEICL approach that is, the application of<br />
Article 2:304 extending into commercial contracts as well as consumer contracts ―because policyholders<br />
need protection against insurers, no matter whether they are consumers or not. Insurers commonly draft<br />
142<br />
143<br />
144<br />
145<br />
146<br />
PEICL, p.177.<br />
Ibid.<br />
[2009] Lloyd‘s Rep IR 149. The view that exclusions in liability insurance must be read ―in context‖ (ie<br />
narrowly) is standard: see Globan Process Systems Inc v Berhad [2011] UKSC5; Selected Seeds Pty Ltd v<br />
QBEMM Pty Ltd [2010] HCA37; Emo Oil Ltd v Sun Alliance and London Assurance Co [2009] IESC2; Allianz<br />
<strong>Insurance</strong> Ltd v RHI Refractories (Africy) Pty 2008 3 SA 425.<br />
<strong>Law</strong> <strong>Commission</strong>, <strong>Reform</strong>ing <strong>Insurance</strong> Contract <strong>Law</strong>, Issues Paper 5<br />
Bankers <strong>Insurance</strong> Co v South [2003] EWHC 380 (Comm); Maple Leaf Macro Volatility Master Fund v Rouvry<br />
[2009] EWHC 257 (Comm).<br />
133
the terms of the insurance contracts in advance, so that policyholders have no opportunity to negotiate<br />
the terms.‖ 147<br />
5.91 The <strong>Commission</strong> considers such a proposition to be a rather sweeping generalisation. Large<br />
companies seeking insurance cover are not to be equated with consumer proposers. Large companies<br />
may often be expected to have specialist departments that will contain the expertise necessary to shop<br />
around and secure cost effective insurance. Large companies should be fixed with actual if not<br />
constructive knowledge of what terms, exclusions and warranties mean and what legal effects follow<br />
therefrom. Large companies may often be expected to engage brokers through whom insurance cover<br />
can be obtained. In circumstances of this kind the <strong>Commission</strong> sees no need to introduce a level of<br />
Judicial Review, or a measure that unduly interferes with Freedom of Contract. Abusive clauses that are<br />
covertly tucked away in proposal forms or which appear, perhaps belatedly, in policy documents will in<br />
any case be the subject of close judicial scrutiny via requirements of good faith and a reasonable<br />
expectations standard. It appears that this requirement may be increasingly a standard that will be<br />
imposed in commercial insurance contracts. 148 The <strong>Commission</strong> also considers that the problem of<br />
abuse of freedom of contract is one that traverses the entire range of commercial contracts. Irish law,<br />
unfortunately, has not sought to address this phenomena in the way that the United Kingdom Parliament<br />
has done (eg, see the non-negotiated standard terms provisions in section 3 of the Unfair Contract Terms<br />
Act 1977). Other legislative models include the Australian Commonwealth Trade Practices Acts 149 and<br />
some specific statutory provisions that may operated on unfair terms; 150 the <strong>Commission</strong> does not think it<br />
is treading on an area of sensitivity when it observes that a broader review of unfair contractual practices<br />
in business to business contracts in Ireland is overdue. However, the <strong>Commission</strong> believes that the<br />
problems that arise in commercial insurance do not necessarily require a sweeping legislative measure.<br />
The <strong>Commission</strong> believes that specific legislation, confined to the insurance sector in relation to possible<br />
abusive terms in all commercial insurance contracts would be premature.<br />
5.92 However, it is clear that some commercial insurance cover is affected in circumstances where<br />
the insurer may seek to avoid honouring a policy on technical and unmeritorious grounds. The facts of<br />
Manor Park Homebuilders Ltd v AIG Europe (Ireland) Ltd 151 provide such an illustration although<br />
McMahon J found for the insured. The decision in the English case US Trading Ltd v Axa <strong>Insurance</strong> Co<br />
Ltd 152 also points up a judicial willingness to impose appropriate standards of notice to proposers and<br />
insureds. The <strong>Commission</strong> believes that small business insureds do require some protection from<br />
abusive clauses, particularly disclaimers and warranties that have not been individually negotiated. The<br />
<strong>Commission</strong> views two possible responses as being worthy of consideration.<br />
5.93 Because the <strong>Commission</strong> believes that small business insureds require protection while at the<br />
same time considering that all business insureds should not be treated in the same way as consumers, a<br />
via media in relation to Article 2:304 could be adopted. Under the existing legislation relating to dispute<br />
settlement jurisdiction of the Financial Services Ombudsman, business to business insurance contracts<br />
(where a corporate insured has a turnover of €3 million or less in the year of the complaint being made)<br />
may refer complaints to the Financial Services Ombudsman. 153 The <strong>Commission</strong> considers it appropriate<br />
that the ordinary courts should also be able to apply what is after all a modified example of the EU<br />
147<br />
148<br />
149<br />
150<br />
151<br />
152<br />
153<br />
Principles of European <strong>Insurance</strong> Contract <strong>Law</strong>, p.116.<br />
Eg US Trading Ltd v Axa <strong>Insurance</strong> Co Ltd [2010] Lloyds Rep IR 505.<br />
Specifically the Trade Practices Act 1974, s.52 and s.53.<br />
Eg the New Zealand Contractual Remedies Act 1979 (eg s.4 on entire agreement clauses). The 2010 South<br />
African Consumer <strong>Contracts</strong> legislation against unfair terms can also be invoked by small business<br />
enterprises.<br />
[2009] 1 ILRM 190.<br />
[2010] Lloyd‘s Rep IR 505.<br />
S.I. No. 190 of 2005. For unincorporated groups of persons – clubs, charities and trust – there is no effective<br />
turnover limit.<br />
134
consumer acquis, that is, the PEICL Article 2:304, to small business insurance disputes and the<br />
<strong>Commission</strong> provisionally so recommends.<br />
5.94 While the <strong>Commission</strong> believes that this solution should be generally effective, it may be that<br />
there is a discrete problem where insurers rely upon promissory warranties so as to reject claims because<br />
of breach of a warranty even if breach had no causal link ‗with the loss‘. The New Zealand 1977<br />
legislation, section 11 was explained as being concerned with the following kind of situation:<br />
―a vehicle the driver of which is intoxicated or which is (perhaps unknown to the driver) in an<br />
unsafe condition is struck from behind while waiting at traffic lights [and liability to indemnify is<br />
avoided] even though the intoxication or the unsafe condition did not contribute to the loss in<br />
any way.‖ 154<br />
5.95 An exclusion from cover, an exemption clause, a condition precedent to liability of the insurer,<br />
and a promissory warranty, are all contractual methods of defining the risk and/or limiting the liability of<br />
the insurer. In cases where the clause requires the insured or the policyholder to act so as to prevent the<br />
risk from materialising, such clauses are generally regarded as promissory warranties. 155 However, the<br />
<strong>Commission</strong> believe that cases which require warranties to be the subject of a rule of reasonable<br />
construction, for example, can limit the warranty by reference to suspensory principles. Although not<br />
strictly a warranty case, Chief Baron Palles, in Gorman v The Hand in Hand <strong>Insurance</strong> Co 156 limited cover<br />
on agricultural equipment to instances where the machinery was in storage in a defined place. Use<br />
elsewhere on the farm took the machinery off cover but when return to storage the cover resumed. 157<br />
5.96 Many of the problems that arise in relation to future warranties, or exceptions that may appear<br />
to contain a temporal rather than a causal element, can and will be dealt with under the general scheme<br />
found in relation to abusive clauses, considered in the following chapter. The need for clear and<br />
transparent drafting of contractual provisions (even provisions which are central or core provisions) as<br />
well as a requirement that the clause meet the reasonable expectations of the proposer/insured, are<br />
imperatives to be met by insurers vis a vis consumers and most businesses. 158 The decisions of the non<br />
statutory <strong>Insurance</strong> Ombudsman of Ireland and the statutory Financial Services Ombudsman contain<br />
several instances where temporal restrictions, 159 as well as over-broad definitions and interpretations, 160<br />
were imposed on insureds. Seen in the light of an insurer‘s legitimate right to either define or limit the risk<br />
being accepted by the insurer, there is nothing objectionable about this. The <strong>Commission</strong> has not found<br />
any compelling evidence to suggest that Irish insurers systematically use promissory warranties in an<br />
objectionable manner although there will always be room for debate in marginal cases. One decision<br />
under the non-statutory <strong>Insurance</strong> Ombudsman Scheme, and one example taken from the Financial<br />
Services Ombudsman‘s case files illustrate the point.<br />
a contents policy covering burglary contained a very specific warranty relating to a burglar alarm<br />
being installed and maintained to the IS 199 standard. The alarm was disconnected to allow<br />
patio work to be undertaken. The new patio door installed was not reconnected, the fitter and<br />
154<br />
155<br />
156<br />
157<br />
158<br />
159<br />
160<br />
NZLC R 46 Some <strong>Insurance</strong> Problems (1998), page 24-25, citing the NZ <strong>Contracts</strong> and Commercial <strong>Law</strong><br />
<strong>Reform</strong> Committee, Aspects of <strong>Insurance</strong> <strong>Law</strong> (1975).<br />
Contrast notification of claims obligations which can have different purposes: Aspen <strong>Insurance</strong> UK Ltd and<br />
others v Pectel Ltd [2009] Lloyd Rep IR 440.<br />
(1877) IR 11 CL 224.<br />
This approach is also evident in some recent English cases – Hussain v Brown [1996] 1 Lloyd‘s Rep 627;<br />
Pratt v Aigaion <strong>Insurance</strong> Company SA [2009] 1 Lloyd‘s Rep 225; AC Ward and Son Ltd v Catlin (Five) Ltd<br />
and others (No.2) [2010] Lloyd‘s Rep IR 695.<br />
See the international standard promoted by the International Association of <strong>Insurance</strong> Supervisors, at<br />
www.iaisweb.org.<br />
Mostly in relation to claims and time limits. These were often side stepped via waiver reasoning see eg Case<br />
85 of the <strong>Insurance</strong> Ombudsman of Ireland 1992-1998.<br />
Financial Services Ombudsman, Case Studies, June 2009 p.20 (meaning of disability).<br />
135
householder each assuming the other would undertake this job. The householder was admitted<br />
to hospital for long term treatment, during which time the patio door was forced open. The<br />
insurer had taken no steps to highlight the warranty, nor was an IS 199 standard provided.<br />
Nevertheless, the warranty was enforceable. 161<br />
less surprising is a decision 162 of the Financial Services Ombudsman who rejected a claim on a<br />
motor policy, the insured being required to keep the vehicle ―in an efficient and roadworthy<br />
condition‖. The vehicle was damaged when it skidded on icy roads. An independent engineer‘s<br />
report found that two bald tyres on the rear wheels were the proximate cause of the accident.<br />
5.97 It is certainly arguable that whatever the status of the IIF Codes of Practice, good insurers do<br />
not appear to use the promissory warranty to reject claims unrelated to the loss. If this is the case, there<br />
seems to be no reason why the industry should object to legislation which removes from Irish law an<br />
argument that is rooted in the worst excesses of a bygone age.<br />
5.98 The <strong>Commission</strong> provisionally recommends that legislation should provide that promissory<br />
warranties must be drafted in plain, intelligible language; and that where there is a doubt about the<br />
meaning of a promissory warranty, it should be reviewed in terms of whether it is an unfair term within the<br />
meaning of the European Communities (Unfair Terms in Consumer <strong>Contracts</strong>) Regulations 1995.<br />
161<br />
162<br />
Case Study 88.<br />
Case 19, December 2007.<br />
136
6<br />
CHAPTER 6<br />
EXCLUSIONS AND UNFAIR TERMS<br />
A<br />
Introduction<br />
6.01 In the previous chapter the <strong>Commission</strong> considered how best to produce a fairer balance<br />
between the legitimate interests of an insurer in identifying and defining the risk to be underwritten and<br />
the need to prevent the reasonable expectations of an insured from being disappointed or frustrated.<br />
That chapter concerned promissory warranties as to the future and warranties of existing fact. In this<br />
chapter the <strong>Commission</strong> will consider express terms that seek to limit or avoid the insurer‘s obligations<br />
under a policy insofar as the loss has arisen at a time or when prescribed circumstances were or, were<br />
not, in being. Contractual exclusions and warranties are often the opposite sides on the same coin.<br />
Similar problems of transparency, reasonableness and fairness arise in relation to exclusion clauses.<br />
The provisional recommendations in this chapter are based upon existing common law and statutory<br />
rules and take account of the recommendations of the authors of the Principles of European <strong>Insurance</strong><br />
Contract <strong>Law</strong>, PEICL. The <strong>Commission</strong> will begin by looking at case-law in relation to the duty of a<br />
proferens to bring contractual terms to the attention of the other party: the <strong>Commission</strong> will then suggest<br />
two provisions, borrowed from Australian law to put the thinking behind these rules onto a statutory<br />
footing in Ireland. The <strong>Commission</strong> will then examine the statutory rules and the PEICL provisions.<br />
B<br />
Rules on Incorporation<br />
6.02 The common law has developed a protective mechanism so as to protect contracting parties<br />
from onerous or unusual contractual provisions that one party might tuck away in boilerplate standard<br />
terms in the hope or expectation that the provisions in question will prevail. While many of the decisions<br />
are old fashioned railway ticket cases involving exemption or limitation clauses, principles of good faith<br />
have been invoked by the English and Irish courts to provide a general principle that applies not just to<br />
exemption or limitation clauses. Furthermore, the principle applies in business to business transactions, 1<br />
as well as in consumer cases. The leading decision is Interfoto Picture Library Ltd v Stiletto Visual<br />
Programs Ltd. 2 A standard term that was contained in a delivery note imposed an unusual fee calculation<br />
in respect of failure in complying with a duty in returning goods hired out, leading to a substantial charge<br />
being due. The English Court of Appeal held that where a particular condition is commonly to be<br />
expected in a contract it will suffice if general notice of the condition given. However, as Bingham LJ<br />
stated:<br />
―where the particular condition relied on involves a sort of restriction that is not shown to be<br />
usual in that class of contract, a defendant must show that his intention to attach an unusual<br />
condition of that particular nature was fairly brought to the attention of the other party‖ 3<br />
6.03 Irish case-law has applied the Interfoto decision on several occasions. In Carroll v An Post<br />
National Lottery 4 Costello J. specifically endorsed Bingham LJ‘s observation, by stating:<br />
―the tendency of the English authorities has, I think, been to look at the nature of the<br />
transaction in question and the character of the parties to it; to consider what notice the party<br />
alleged to be bound was given of the particular condition said to bind him; or to resolve<br />
1<br />
2<br />
3<br />
4<br />
Kaye v Nu Skin Ltd (Rev 1)[2011] 1 Lloyds Rep 40; AEG (UK) Ltd v Logic Resource Ltd [1995] CLC 265.<br />
[1988] 1 All ER 348. Contrast Photolibrary Group Ltd v Burdar Senator Verlong [2008] EWHC 1343 (QB).<br />
[1988] 1 All ER 348 at 357 (Bingham LJ).<br />
[1996] 1 IR 443. See also Charleton J in McCabe Builders (Dublin) Ltd v Sagamu Developments Ltd [2007]<br />
IEHC 391 and in James Elliot Construction Ltd v Irish Asphalt Ltd [2011] IEHC 269.<br />
137
whether in all the circumstances it is fair to hold him bound by the condition in question. This<br />
may yield a result not very different from the civil law principle of good faith, at any rate so far<br />
as the formation of the contract is concerned‖ 5<br />
6.04 If the condition in question is clearly displayed on a website for example, and the user<br />
repeatedly accesses the website, then reasonable notice will have been given: Ryanair Ltd v<br />
Billigfluege.de GmbH 6 . But an unusual and oppressive term in an employment contract was held not to<br />
have passed the Interfoto standard by TC Smyth J in Finnegan v JE Davy. 7 Even in the absence of<br />
Interfoto, there are several Irish decisions on incorporation that signify a higher duty to spell out the<br />
existence and import of sweeping contractual terms, as distinct from mundane or unobjectionable<br />
conditions of contract. 8<br />
6.05 The general proposition behind the Interfoto ―good faith‖ approach to unusual or onerous<br />
contractual clauses that have neither been individually negotiated nor specifically drawn to the attention of<br />
the proposer/insured has recently been applied to insurance contracts in US Trading Ltd v AXA <strong>Insurance</strong><br />
Co Ltd. 9 The clause in question here was a stipulation that the proposers, a food processing company,<br />
would be required to clean the cooker extraction system every three months. Following a fire at the<br />
premises, the insurer repudiated the policy on the basis that the stipulation was a warranty and that it had<br />
not been complied with. Starting from the position that when a proposer entered into a contract of<br />
insurance the proposer did so on the insurer‘s normal terms, the alleged warranty was not shown to have<br />
been a normal term, nor was it individually negotiated: as such the alleged warranty was not part of the<br />
contract. The warranty was regarded as particularly onerous and such terms would only be incorporated<br />
into a policy if it was brought fairly and reasonably to the attention of the proposer. Simon Brown QC,<br />
sitting as a Deputy Judge in the English Queens Bench Division, refused to allow the insurer to rely upon<br />
the special clause:<br />
‖Special Condition 4 was a particularly onerous term. An onerous term will only be<br />
incorporated into a policy if it is brought fairly and reasonably to a party‘s attention… There is<br />
no evidence that Special Condition 4 was brought to the attention [of the insured]‖ 10<br />
(1) Interpretation of the Exclusion<br />
6.06 The cases on this point are legion but a recent English decision gives a flavour of how an<br />
exclusion in a policy may be denied effect by giving the words of a clause a plain and ordinary meaning.<br />
In Widefree Ltd v Brit <strong>Insurance</strong> Ltd 11 a jeweller in Hatton Garden discovered that a ring from his stock<br />
had gone missing when he attempted to show the ring to a particular customer. The jeweller recalled an<br />
earlier incident in his shop when two customers had acted suspiciously. After reviewing CCTV footage<br />
the jeweller called in the police who agreed that the theft had taken place at the time of the earlier<br />
incident. The policy contained an unexplained loss exclusion when the loss was discovered at<br />
stocktaking. The High Court held the exclusion did not apply. The CCTV and other evidence identified<br />
the time when the loss occurred as being outside the stocktaking exercise – that word ―stocktaking‖<br />
related to a structured organised process taking place at regular intervals. This discovered loss was not<br />
within any such framework. Apart from incorporation rules, judges can subject express terms to a<br />
process of hostile interpretation. This is particularly the case in relation to exclusions and promissory<br />
5<br />
6<br />
7<br />
8<br />
9<br />
10<br />
11<br />
[1988] 1 All ER 348 at 357. See generally Zimmerman and Whittaker, Good Faith in European Contract <strong>Law</strong><br />
(CUP 2000).<br />
[2010] IEHC 18: Century 21 Canada Limited Partnership v Rogers Communications [2011] BCSC 1196.<br />
[2007] IEHC 18<br />
Western Meats v National ICC and Cold Storage [1982] ILRM 101; Sugar Distributors Ltd v Monaghan Cash<br />
and Carry Ltd [1982] ILRM 399.<br />
[2010] Lloyd‘s Rep IR 505.<br />
Ibid, p 515.<br />
[2009] Lloyds Rep IR 440. See also Reilly v National <strong>Insurance</strong> and Guarantee Corp Ltd [2009] Lloyd‘s Rep.<br />
IR 488 (exclusion for failure of machinery: incorrect pressure in a cylinder not failure of machinery).<br />
138
warranties. A variety of mechanisms are available such as contra proferens interpretation (e.g. Sweeney<br />
and Kennedy‟s Arbitration) 12 or arguing a warranty has a suspensory rather than promissory effect 13 .<br />
These interpretive techniques are useful palliative measures but they fail to deal with the underlying<br />
problem of contractual unfairness and in many instances good contract drafting will make it difficult for a<br />
court to operate interpretative techniques e.g. if the clause is not ambiguous the general view is that<br />
interpretation contra proferens is not possible 14 .<br />
(2) General Principles to be added to Irish <strong>Law</strong><br />
6.07 The <strong>Commission</strong> considers that Irish law might usefully articulate two basic principles that<br />
would serve to put many of the points made in the above discussion on incorporation and good faith onto<br />
a statutory footing. The <strong>Commission</strong> has relied heavily on principles from the Australian <strong>Insurance</strong><br />
<strong>Contracts</strong> Act 1984. The first principle revolves around good faith and the inability of either party to rely<br />
on a contractual provision where to do so would be to fail to act with the utmost good faith. This is found<br />
in section 14 of the Act whuch, as amended, reads:<br />
―Parties not to rely on provisions except in the utmost good faith<br />
(1) If reliance by a party to a contact of insurance on a provision of the contract would be to fail<br />
to act with the utmost good faith, in the light of the circumstances in which the contract of<br />
insurance was concluded, the party may not rely on the provision.<br />
(2) Subsection (1) does not limit the operation of the common law duty of utmost good faith.<br />
(3) In deciding whether reliance by an insurer on a provision of the contract of insurance would<br />
be to fail to act with the utmost good faith, the court shall have regard to any notification of the<br />
provision that was given to the insured, or otherwise.‖<br />
6.08 The <strong>Commission</strong> provisionally recommends that legislation be enacted to provide that an<br />
insurance contract should be subject to a good faith requirement, namely that if reliance on a term in an<br />
insurance contract would constitute a failure to act with the utmost good faith the party may not rely on<br />
that term.<br />
6.09 The second provision that might usefully be imported into Irish law from Australia on the<br />
formation of insurance contracts is contained in section 37 of the 1984 Act. The text of section 14 of the<br />
1984 Act actually contains a reference to section 37 which the <strong>Commission</strong> considers to be redundant<br />
and it has been omitted from our suggested text above. Our modification of section 37 provides for<br />
notification of unusual terms.<br />
An insurer may not rely on a provision included in a contract of insurance of a kind that is not<br />
usually included in contracts of insurance that provide similar insurance cover unless, before<br />
the contract was entered into the insurer clearly informed the insured in writing of the effect of<br />
the provision (whether by providing the insured with a document containing the provisions, or<br />
the relevant provisions, of the proposed contract or otherwise). Where appropriate, the<br />
document shall include an explanation of technical or legal words or phrases.<br />
6.10 The <strong>Commission</strong> provisionally recommends that there should be a statutory duty on an insurer<br />
to draw attention to unusual terms.<br />
(3) 1993 Unfair Contract Terms Directive and PEICL Abusive Clauses Provisions<br />
6.11 The Principles of European <strong>Insurance</strong> Contract <strong>Law</strong> recast the 1993 Unfair Contract Terms<br />
Directive 15 to address situations where contract clauses may allow an insurer to avoid a policy on what<br />
12<br />
13<br />
14<br />
15<br />
[1950] IR 85.<br />
Ie. non compliance is operative only insofar and for as long as the warranty is not complied with.<br />
Danske Bank v McFadden [2010] IEHC 116, citing Clarke, The <strong>Law</strong> of <strong>Insurance</strong> <strong>Contracts</strong> 5th ed at<br />
paragraph 15.5. See also Meritz Fire and Marine <strong>Insurance</strong> Co Ltd v Jan De Nul NV [2010] EWHC 3362<br />
(Comm)(a surety case).<br />
Directive 93/13/EC, transposed into Irish <strong>Law</strong> by SI No 27 of 1995.<br />
139
may be regarded as technical or unmeritorious grounds. While the Directive clearly applies to insurance<br />
contracts and the <strong>Insurance</strong> Ombudsman of Ireland Scheme features instances where the Directive has<br />
been considered in the course of adjudications, there are no United Kingdom or Irish court decisions that<br />
fully consider how the Directive may play a part in resolving disputes involving allegations of procedural or<br />
substantive unfairness. Indeed, the <strong>Law</strong> <strong>Commission</strong>s observe that the UK regulations transposing the<br />
Directive, effective since July 1, 1995, ―appear to have had surprisingly little impact on the insurance<br />
industry‖ 16 .<br />
6.12 The paucity of case-law on how the Unfair Contract Terms Directive has impacted upon<br />
insurance contractual practices might suggest that there are relatively few situations in which contract<br />
clauses have the potential for creating unfair commercial practices, either on an individual or a systemic<br />
basis. An alternative view may be that the Directive has deterred insurers from using clauses that, at the<br />
very least, fall foul of the indicative and non-exhaustive ―grey‖ list in the Directive itself. The limited<br />
perusal of some 6 property insurance policies undertaken by the <strong>Commission</strong>, however suggests that<br />
several potentially unfair terms continue to be in standard use by insurers in Ireland.<br />
6.13 A more likely explanation for the underwhelming impact that the 1993 Directive has had on UK<br />
and Irish contractual drafting lies in both the generic nature of the Directive itself, the lack of clarity that<br />
several key provisions in the Directive possess (specifically in an insurance context), as well as<br />
uncertainty over the relationship between the procedural and substantive aspects of unfairness.<br />
6.14 Because the Directive applies to consumer contracts generally, Member States were not<br />
expected to contextualise the requirements of the Directive in national transposing legislation on a<br />
sectoral basis. Both the United Kingdom and Ireland transposed the Directive by way of Statutory<br />
Instrument 17 without the benefit of the recitals, useful in this context insofar as the recitals provide<br />
guidance on the extent to which the Judicial Review mechanism contained in the Directive is applicable to<br />
consumer insurance 18 . While a court would of course resort to the full text of the Directive, it is a common<br />
complaint 19 that the bare transposition of a Directive, shorn of the useful interpretive assistance to be<br />
gleaned from recitals, is hardly a satisfactory legislative process, especially in consumer protection law.<br />
6.15 The Directive itself provides assistance on interpreting what provisions in an insurance contract<br />
are, and are not, likely to be subject to judicial scrutiny under the Directive, recital 19 fleshes out the<br />
distinction between (non-reviewable) core terms and reviewable terms under the Directive.<br />
For the purposes of this Directive, assessment of unfair character shall not be made of terms<br />
which describe the main subject matter of the contract nor the quality/price ratio of the goods or<br />
services supplied… It follows, inter alia, that in insurance contracts, the terms which clearly<br />
define or circumscribe the insured risk and the insurer‘s liability shall not be subject to such<br />
assessment since these restrictions are taken into account in calculating the premium paid by<br />
the consumer.<br />
6.16 This recital suggests that terms that relating to the premium to be charged – the price – are<br />
exempt from scrutiny on the basis that such a term relates ―to the definition of the main subject matter of<br />
the contract‖, to quote from Article 4(2) of the Directive itself. Therefore, it is certainly arguable (and<br />
MacGillivray 20 appears to take this position) that exclusions and warranties, provisions which both define<br />
and circumscribe a risk, and which will play an important part in determining the premium, are exempt<br />
from scrutiny. Certainly, the <strong>Law</strong> <strong>Commission</strong>s did not dissent from the view that recital 19 and article<br />
16<br />
17<br />
18<br />
19<br />
20<br />
Joint Consultation Paper, para. 2.106. The only case referred to is Bankers <strong>Insurance</strong> Co v South [2003]<br />
EWHC 380 (Comm), a travel insurance case. There has been one more recent English case, Direct Line<br />
<strong>Insurance</strong> v Fox [2010] Lloyd‘s Rep IR 324.<br />
In Ireland see S.I. No. 27 of 1995. In the UK see S.I. 1994/3159, replaced by S.I. 1999/2083.<br />
Particularly recital 19.<br />
See White, Commercial <strong>Law</strong> (Round Hall 2002) and ‗Consumer Sale and Associated Guarantees‘ (2000) 7<br />
CLP3.<br />
11 th edition, paras 10-020 and 11-036.<br />
140
4(2) of the Directive had this result, pointing to both the opinion of text books and Bankers <strong>Insurance</strong><br />
Company v South 21 . A policy of holiday insurance, which contained a term excluding accidents<br />
occasioned by ―motorised waterborne craft‖, the insured being responsible for injuring another jet skier,<br />
was held to be outside the scope of the Directive. On the other hand, Rühl contrasts the UK position with<br />
that found in Germany:<br />
[t]he provisions that implement the EC Directives, s.305-310 of the Civil Code do apply to<br />
contractual provisions that impose obligations on the policyholders. This is because these<br />
provisions are not considered to define the subject matter of the insurance contracts in the<br />
meaning of s.307(1) of the Civil Code and paragraph 19 of the EC Directive. Instead, they are<br />
classified as limitations or modifications of the subject matter which are not excluded from the<br />
assessment of fairness. The pool of contractual provisions that actually define the subject<br />
matter of the insurance contracts, in contrast, is determined rather narrowly: Only terms that<br />
describe the core of the contractual agreement – meaning a brief description of the insured risk<br />
as well as the premium to be paid – are deemed exempt from scrutiny under the EC Directive.<br />
As a result, contractual obligations of the policyholder are not covered by the exemption of<br />
s.307(1) of the Civil Code and – other than in England – are fully subjected to the assessment<br />
of fairness 22<br />
6.17 While there is no clear guidance in the European Communities (Unfair Terms in Consumer<br />
<strong>Contracts</strong>) Regulations 1995 (which impm,emented the 1993 Directive) Ellis‘s views on core and noncore<br />
provisions in Irish insurance contracts are of considerable interest.<br />
(4) Core and Subsidiary Terms – An Irish View<br />
6.18 Ellis provides a valuable analysis of the scope of the 1995 Regulations and a personal view on<br />
when certain terms are likely to be reviewable by an Irish Court. Ellis begins his analysis 23 by<br />
commentating that, in the abstract, the operative clause of an insurance policy (that is, the statement<br />
about the extent of the cover provided) as well as exclusion clauses‖ are probably examples of core<br />
terms‖. He stops short of arguing that all operative clauses and exclusions will be core terms. In relation<br />
to insurance contracts other than life and personal accident insurance, such policies are contracts of<br />
indemnity. The indemnity principle, as well as other attendant implied conditions such as subrogation and<br />
contribution are terms which are required to be present on public policy grounds and are thus not<br />
reviewable (along with the uberimae fidei principle) 24 . Ellis however goes even further by observing that<br />
the provisions in the IIF Codes of Practice should also be regarded as mandatory rules, being implied<br />
contractual terms. This is a view for which there is no judicial support and, given the uncertainty<br />
surrounding the status of the IIF Codes of Practice, post the introduction of the Financial Regulator‘s<br />
Code and the Financial Services Ombudsman‘s Statutory Adjudication mechanism, it is submitted that<br />
the proposition is no longer arguable 25 . For policy reasons it is not desirable to define core obligations too<br />
widely, even if some other IIF Code provisions seek to restrict or abridge rights afforded to insurers under<br />
the ordinary law on insurance (e.g. on warranties).<br />
6.19 On the question of basis of contract clauses, Ellis is very clear, although again the uncertain<br />
status of the IIF Codes of Practice causes some difficulty for his argument that:<br />
21<br />
22<br />
23<br />
24<br />
25<br />
[2003] EWHC 380 (Comm).<br />
(2006) 55 ICLQ 879 at p902-3 (footnotes omitted). On the core term issue generally see Principles of<br />
European <strong>Insurance</strong> Contract <strong>Law</strong> p.116-117 which appears to suggest that ―England‖ (sic) and Ireland may<br />
be isolated in giving the core provision exemption such wide scope.<br />
Ellis, Modern Irish Commercial and Consumer <strong>Law</strong> (Jordan‘s 2004) Chapter 32.<br />
Schedule 1(e)(i) of the Unfair Contract Terms Regulations 1995 (S.I. No.27 of 1995). Ellis also cites an<br />
insurable interest requirement as being necessary on public policy grounds in every insurance contract. The<br />
<strong>Commission</strong> suggests that this may be too extensive a claim.<br />
Ellis was writing in 2004.<br />
141
―Basis of contract clauses would be assessable by a court as non-core terms under the 1995<br />
Regulations, had the Codes of Practice not effectively abolished them‖.<br />
6.20 The express terms that Ellis regards as being reviewable on the basis that they are subsidiary<br />
and unlikely to have been individually negotiated he sets out as follows:<br />
(1) duty on insured to notify increases in risk (or change of insured‘s circumstances);<br />
(2) duty on insured to take reasonable care of property insured;<br />
(3) duty to inform insurer immediately of any alienation or transfer of the insurable interest;<br />
(4) terms under which the policy can be cancelled prematurely by both parties;<br />
(5) arbitration conditions;<br />
(6) claims conditions requiring the insured:<br />
(a) to give the insurer notice of a possible claim as soon as reasonably possible;<br />
(b) not to admit liability (in third party insurances) for, or negotiate settlement of, any<br />
claim without the insurer‘s written consent;<br />
(7) imposing a duty on the insured not to act in a fraudulent manner, and making it clear that<br />
if any claim is fraudulent, it will not be paid and all cover under the policy will be forfeited;<br />
(8) express conditions modifying the common law doctrine of subrogation and contribution<br />
may also be included 26<br />
6.21 Ellis and Wiltshire in Regulation of <strong>Insurance</strong> in the UK, Ireland and the EU 27 give their view on<br />
the boundary between core and non-core insurance terms:<br />
‖It is submitted that the following might be considered examples of core insurance contract<br />
terms:<br />
• contents of operative clauses describing the events insured;<br />
• exclusions from cover;<br />
• the condition of utmost good faith;<br />
• express conditions requiring an insured to disclose material changes in the risk‖ 28<br />
Ellis and Wiltshire also observe that cancellation and arbitration clauses would also seem to be prima<br />
facie unfair terms although they note an unreported Circuit court decision on arbitration clauses in a<br />
holiday insurance case that stands against this position. 29 . Ellis and Wiltshire also suggest that non core<br />
terms ―might include‖<br />
• ―conditions precedent to liability, i.e. claims notification conditions and nonadmission<br />
of liability conditions<br />
• arbitration conditions (mentioned specifically in s.1(q) of Sch.3);<br />
• cancellation conditions (see s.1(f) of Sch.3);<br />
• possibly express subrogation and contribution conditions but only to the extent<br />
that they vary the common law conditions. These conditions of subrogation and<br />
contribution implied at common law are so fundamental that they are unlikely to<br />
be subject to the tests in Sch.3.‖ 30<br />
(5) Non Core Terms and Exclusions – The <strong>Law</strong> <strong>Commission</strong>s Joint Consultation Paper<br />
6.22 The <strong>Law</strong> <strong>Commission</strong>s, in the 2007 Consultation Paper, provide a succinct example of a<br />
situation where the same insurance product might fall on either side of the core/noncore term boundary,<br />
depending on context:<br />
―take a case where a policy was sold as ―insurance for winter sports adventure holidays‖, but a<br />
sub-paragraph of one of the lengthy policy terms excluded off-piste skiing, and no particular<br />
26<br />
27<br />
28<br />
29<br />
30<br />
Para 32.8, footnotes omitted.<br />
Thomson Reuters (2 Volume Looseleaf).<br />
Ellis & Wiltshire, Regulation of <strong>Insurance</strong> in the UK, Ireland and the EU (Thompson Reuters) page E2.37.<br />
See E. 2-36.<br />
E.2-37. The authors also observe that contractual duties of pre-contractual disclosure may be seen as one of<br />
the circumstances that might be considered in assessing the fairness or otherwise of a particular term. This<br />
comment seems to be directed at the question whether a proposer has been informed of the nature and<br />
consequences of the duty, so some fundamental implied duties are relevant under SI 27 of 1995.<br />
142
attempt was made to bring this to the proposer‘s attention. The exclusion of off-piste skiing<br />
would not be a core term. However, if the policy were sold explicitly as ―suitable for skiing on<br />
piste‖, the same term might be exempt from review, provided it was presented in a plain<br />
intelligible way‖ 31 .<br />
6.23 On the more controversial issue of how warranties are treated, if at all, under the Unfair<br />
Contract Terms Directive, the <strong>Law</strong> <strong>Commission</strong>s conclude that warranties may be core terms that<br />
describe the subject matter of a contract, whether the warranty be one of existing fact or future<br />
obligation 32 . The <strong>Commission</strong> agrees with this view. To give an example, there is no substantive<br />
difference between a warranty that a burglar alarm meeting an ISO standard is in place to a warranty that<br />
such an alarm will be fitted within 1 month of cover commencing. If both provisions make it clear that non<br />
compliance renders the policy ineffective then the purpose behind the Community legislation will have<br />
been largely achieved. The problem that must frequently arises in relation to warranties is that neither of<br />
the procedural requirements required under the Directive – intelligible drafting of the term itself, and the<br />
need to satisfy a reasonable expectations test – are always readily met. The <strong>Law</strong> <strong>Commission</strong>s argued<br />
that the second of these two factors is a powerful counterweight to the formal rules governing warranties<br />
in insurance law:<br />
Consider the legal effect of a breach of the warranty. It will discharge the insurer from liability<br />
under the policy automatically, so that there is no liability for any loss even if the matter<br />
warranted was immaterial, or the loss was completely unrelated to the breach (for example,<br />
flood damage). The insurer is discharged from liability even if the breach of warranty has been<br />
cured before the claim arose. As we argued earlier, it is most unlikely that these results accord<br />
with the reasonable expectations of any insured, least of all a consumer – unless he or she<br />
happens to be an insurance lawyer. Thus for the warranty to be exempt as a ―core term‖, the<br />
consequences of a breach of warranty would have to be spelled out in full, in clear and<br />
intelligible language and in a way that left the consumer in no doubt about what to expect. 33<br />
6.24 Substantive unfairness is often relegated to a subsidiary role. However, if the insurer does not<br />
overcome these procedural requirements, or if the term is itself incidental or non core, the Directive<br />
requires the courts to consider the substantive unfairness of the provision, judged at the time when the<br />
contract was made. The <strong>Law</strong> <strong>Commission</strong>s argue that this question has two dimensions. Substantive<br />
unfairness may undermine warranties that, in isolation, seek to do too much for the insurer:<br />
The court is required to assess the fairness of the term at the time the contract was made. It<br />
is not asked to assess whether the term has been applied fairly in the particular circumstances<br />
of the loss. Thus if the term gives the insurer the right to avoid even when the breach of<br />
warranty was immaterial, it will be no answer that in the particular facts the loss that has been<br />
incurred was caused directly by the breach of warranty. If the warranty as a whole was unfair,<br />
the insurer simply cannot reply on it at all. 34<br />
6.25 The second dimension addresses warranties from the perspective of judicial interpretation of<br />
the clause, the <strong>Law</strong> <strong>Commission</strong>s arguing that the principle of meeting reasonable consumer<br />
expectations will influence this process:<br />
It might be argued that most warranties are fair on the face. The unfairness arises only<br />
because of the way they are applied. However, before assessing the fairness of a term the<br />
court must interpret it. Suppose, for example, that an insurer seeks to rely on the lock warranty<br />
to reject a claim for flood damage. The court would first have to decide whether the term was a<br />
true warranty, and was intended to exclude flood claims in this way. If the court accepts the<br />
insurer‘s case that the term has a wide meaning, then it is likely to hold that the term is unfair.<br />
31<br />
32<br />
33<br />
34<br />
Para 2.90.<br />
The contrary argument, that a warranty does not describe the subject matter of the contract (and is thus noncore)<br />
is rejected at para.2.98.<br />
Para 2.100.<br />
Para 2.101.<br />
143
The court may be influenced by the fact that this use of the term [flies in the face of (non<br />
binding) codes of practice denying reliance of clauses with no causal link]. As a result, the<br />
term would not be binding on the consumer, and the insurer could not rely on it to avoid paying<br />
the claim. If the court gives the term a narrow meaning, merely to except burglary claims while<br />
the lock is not fitted, then the term is more likely to be considered fair – but it would not assist<br />
the insurer to resist liability for flood damage. 35<br />
(6) The PEICL View on the Boundary Between Core and Non-Core Terms<br />
6.26 The boundary between reviewable and non reviewable terms is elaborated on by the authors<br />
of the PEICL. In drafting Article 2:304 Abusive Clauses, the Article itself states that the review powers<br />
apply:<br />
―to terms that restrict or modify cover but it applies neither to<br />
(a) the adequacy in value of the cover and the premium, nor to<br />
(b) terms that state the essential description of the cover granted or the premium agreed,<br />
provided the terms are in plain and intelligible language.‖<br />
6.27 The authors of the PEICL point out that there is an ambiguity in the Directive in the sense that<br />
the English language text implies that every term that defines the risk or the insurer‘s liability is taken into<br />
account in calculating the premium and is thus exempt as a core term. The German version of the<br />
Directive however states that the exemption only applies if the term is actually considered in calculating<br />
the premium. As a matter of policy, the European <strong>Commission</strong> regards it as desirable that a narrow view<br />
of the exemption should be adopted, and this accords with the approach endorsed by Lord Bingham in<br />
particular in the House of Lords. In Director General of Fair Trading v First National Bank 36 the Office of<br />
Fair Trading challenged the fairness of interest calculation provisions in a credit agreement. Rejecting an<br />
argument that the term was not reviewable because the term created a Bank‘s right to post judgment<br />
interest and was thus concerned with the adequacy of the price or remuneration for the banking service,<br />
their Lordships characterised the term as a default provision rather than an essential or core feature of<br />
the bargain. Lord Steyn described the term as a subsidiary term, remarking that the exemption must be<br />
given a restrictive interpretation so as to prevent the Directive from being subverted by endless<br />
formalistic 37 arguments as to whether a provision is definitional or an exclusionary provision. All members<br />
of their Lordship‘s House endorsed Lord Bingham‘s view that the UK transposing regulations and the<br />
Directive are intended:<br />
―to protect consumers against the inclusion of unfair and prejudicial terms in standard-form<br />
contracts into which they enter, and that object would plainly be frustrated if regulation 3(2)(b)<br />
[of the UK SI] were so broadly interpreted as to cover any terms other than those falling<br />
squarely within it.‖ 38<br />
6.28 The authors of the PEICL give as an example of the boundary between definitional and<br />
subsidiary terms the case of a policyholder taking out ―professional indemnity insurance‖: such a<br />
description would imply the exclusion of general liability as part of the definition of ―the type and subject of<br />
insurance‖. The PEICL authors observe that such an implicit exclusion ―would not be subject to review.<br />
However, if a term of the policy excludes liability for pure economic loss, such a term would be subject to<br />
review‖. 39<br />
6.29 In tailoring Article 4(2) of Directive 1993/13/EC to the law of insurance by way of Article 2:304,<br />
the PEICL authors have replaced the phrase, ―main subject matter of the contract‖ with, ―terms that state<br />
the essential description of the cover granted or the premium agreed‖. This is further elaborated on in a<br />
Comment:<br />
35<br />
36<br />
37<br />
38<br />
39<br />
Ibid.<br />
[2002] 1 AC 481<br />
[2002]1 AC 481 at 499<br />
[2002]1 AC 481 at 491<br />
PEICL, p.117<br />
144
the relevant terms are those that give a crucial definition of the type and subject of insurance,<br />
the insured risk, the insurer‘s liability, the insurance benefit, the sum insured, the insured<br />
interest or the insurable value. Terms restricting, changing, elaborating or modifying the<br />
insurer‘s obligation to perform are, however, not core terms and therefore subject to review<br />
under Article 2:304 40 .<br />
6.30 The most important safeguards that European consumers have under the Unfair Contract<br />
Terms Directive are arguably, procedural other than substantive. For even a core term to qualify for<br />
exemption from scrutiny, that is, the danger that a contractual term will be invalid because:<br />
(1) it is unfair (e.g. as appearing on a grey list)<br />
(2) it was not individually negotiated<br />
(3) contrary to the requirements of good faith and fair dealing, it causes a significant<br />
imbalance in the rights and obligations of parties and is detrimental to the interests of the<br />
consumer.<br />
The term in question must satisfy the following two key requirements.<br />
6.31 First, the exemption has to be in plain language. Article 4(2) of the Directive mandates that,<br />
the exemption from scrutiny applies insofar as these terms are in plain intelligible language. The <strong>Law</strong><br />
<strong>Commission</strong>s also reject Professor Malcolm Clarke‘s view that recital 19 does not insist on such a<br />
requirement, pointing out that article 4(2) takes precedence over recital 19 and that, in any case, recital<br />
19 itself requires a core term to ―clearly‖ define or circumscribe the insured risk. The scope of this<br />
requirement is uncertain. For example, is an average provision one which defines the risk or<br />
circumscribes the risk? Even if it is not a core term, does the term have to be explained (e.g. by way of<br />
examples on the consequences of under insuring)?<br />
6.32 The second condition is that the reasonable expectations of the consumer. Although the<br />
decision of MacMenamin J in O‟Reilly v Irish Life Assurance plc 41 is somewhat inconclusive on the scope<br />
of any duty to provide a bargain which reflects the reasonable expectations of a proposer/insured, the<br />
case articulates the view that the process of interpreting an insurance policy seeks to:<br />
―find the meaning which the document would convey to a reasonable person having all the<br />
background knowledge reasonably available to the parties, including anything which would<br />
have affected the way a reasonable person would have understood it but excluding previous<br />
negotiations or subjective intent.‖ 42<br />
Even commercial bargains should not be occasions for imposition or ―surprise‖. It is for such reasons that<br />
oral contracts are not generally interpreted so as to contain unusual or non-standard provisions that were<br />
perhaps tucked away in preliminary documents: Capes (Hatherton) Ltd v Western Arable Services. 43<br />
Within the specific context of the Unfair Contract Terms Directive the <strong>Law</strong> <strong>Commission</strong>s argue that recital<br />
20 requires not only that the terms of the contract should be drafted in plain, intelligible language, but also<br />
the consumer should be given the opportunity to examine all the terms. The <strong>Law</strong> <strong>Commission</strong>s have<br />
endorsed the view of the Office of Fair Trading that a core term will only be exempt from review as<br />
defining the main subject matter of the contract ―if it is part of the way consumers perceived the bargain‖.<br />
Tucking terms or disclaimers away into contracts in places where a consumer is unlikely to see it, and<br />
even providing terms or disclaimers after the contract has been agreed could well fall foul of such<br />
40<br />
41<br />
42<br />
43<br />
Ibid.<br />
[2005] IEHC 449.<br />
At para 87. Although noticeably cool on Steyn L.J.‘s speech in First Energy (UK) Ltd v Hungarian International<br />
Bank Ltd [1993] 2 Lloyd‘s Rep 194 at 196, MacMenamin J‘s approach is not, it is submitted, very different to<br />
Steyn L.J.‘s desire to ensure that ―the reasonable expectations of honest men must be protected‖.<br />
[2010] 1 Lloyd‘s Rep.477. See in particular both the English High Court and Court of Appeal decisions in<br />
William McIlroy (Swindon) Ltd v Quinn <strong>Insurance</strong> [2011] EWCA Civ 825.<br />
145
―consumer‘s reasonable expectations‖ standards 44 . It may be that even if the term is subject to the<br />
fairness test it would pass muster 45 , but the need for clear and transparent drafting and accessibility to<br />
contractual terms in a timely fashion seem a reasonable precondition to set for the validity of core<br />
provisions and other essential terms. The Directive generally appears to be concerned with situations<br />
where the court concludes that there was such a lack of openness, fair dealing or good faith so as to<br />
render a contractual provision unfair. 46<br />
6.33 Clauses that may be found in insurance contracts that are referred to in the Annex to the 1993<br />
Directive and in Schedule 3 of the European Communities (Unfair Terms in Consumer <strong>Contracts</strong>)<br />
Regfulatinos 1995 (which implemented the 1993 Directive in Ireland) are grouped under the following 6<br />
headings by the authors of the PEICL:<br />
1. Hidden Terms: These include terms that are not fully disclosed or intelligible to the<br />
consumer, terms which cross refer to legal provisions not disclosed in the contract ―small print‖<br />
provisions and entire agreement clauses.<br />
2. Exculpatory Provisions: Terms excluding or limiting liability for non-performance or<br />
defective performance, one sided performance obligations.<br />
3. Terms imposing Barriers to Redress: These clauses include evidentiary obstacles,<br />
onerous rules on maintaining and proving a claim, arbitration clauses, clauses that otherwise<br />
enable slow payment of a claim.<br />
4. Cancellation Clauses: Insurers having unilateral rights to cancel, particularly when this<br />
can be done without the insured being able to arrange cover or recover the premium.<br />
5. Unilateral Variation of Cover. For example, an insurer, who, without good cause, can<br />
unilaterally vary either the cover or the premium, or assign the policy, may have to defend such<br />
a clause.<br />
6. Penalty provisions. A term that imposes a disproportionate penalty for breach by the<br />
consumer will be reviewable. Seen in context, the 1993 Directive affords a significant range of<br />
remedies to the consumer. For example, it is arguable that an innocent misrepresentation by a<br />
proposer, which affords an insurer a right of avoidance is itself a disproportionate penalty under<br />
category 6 above, even if the Marine <strong>Insurance</strong> Act 1906 provides a legislative endorsement of<br />
this common law rule.<br />
(7) The 1995 Regulations and <strong>Insurance</strong> Adjudications in Ireland<br />
6.34 The Financial Services Ombudsman has not specifically referred to the 1995 Regulations in<br />
any of the Case Studies released on the Ombudsman‘s website. However, general standards of<br />
―fairness‖, ―reasonableness‖, and a desire to avoid inequitable results permeate the Ombudsman‘s<br />
decisions. Two examples from 2009 47 illustrate this point:<br />
An elderly man died of cardiac arrest following a fall. Death benefit was refused on the<br />
basis that the cause of death was a heart attack and the insured event, as stipulated in<br />
the policy, related to a death, the ―sole‖ cause of which was bodily injury. The<br />
Ombudsman held the policy was too strict and narrow, directing the company to review<br />
the wording to ―reduce the risk of unfairness to policyholders‖.<br />
While the Ombudsman upheld the right of a health insurance company to change the<br />
terms of a policy at renewal and adjust the premiums upwards, the introduction of a new<br />
44<br />
45<br />
46<br />
47<br />
Joint Consultation Paper 2007: <strong>Insurance</strong> Contract <strong>Law</strong>: Misrepresentation, Non-Disclosure and Breach of<br />
Warranty by the Insured, at para 2.94.<br />
R&B Customs Brokers Co Ltd [1988] 1 WLR 321; Smith v Eric S Bush [1990] 1 AC 381; Watford Electronics<br />
Ltd v Sanderson [2001] 1 All ER (Comm) 696.<br />
Bryen & Langley Ltd v Boston [2005] EWCA Civ 973, applied in Maple Leaf Macro Volatility Master Fund v<br />
Rouvroy [2009] EWHC 257 (Comm).<br />
See Case Studies at www.financialombudsman.ie.<br />
146
waiting period under a policy said to be an ―upgrade‖ of a previous policy was not<br />
permitted. Compensation of €2,000 to the complainant was also awarded.<br />
6.35 The decisions of the non-statutory <strong>Insurance</strong> Ombudsman of Ireland contain overt references<br />
to the 1995 Regulations.<br />
6.36 In Case Study 95 48 , the <strong>Insurance</strong> Ombudsman of Ireland took a cautious approach on the<br />
issue of jurisdiction. The case involved an issue of interpretation relating to a holiday insurance<br />
exclusion. While the <strong>Insurance</strong> Ombudsman noted that the insurer was relying on the exclusion in Recital<br />
19, the clause was upheld on the basis that:<br />
It was a common exclusion and not unusual<br />
It was not unfair as it limited cover<br />
The policy itself was clear on what was and was not covered.<br />
6.37 The <strong>Insurance</strong> Ombudsman also ruled that the question whether an exclusion clause should<br />
be deleted from a policy was an underwriting decision outside the jurisdiction set by the IIF‘s terms of<br />
reference for the Scheme. Nevertheless, several of the early adjudications by the <strong>Insurance</strong> Ombudsman<br />
reflect a fair and reasonable terms approach. For example,<br />
Imposition of penal compound interest rates on premium arrears and failure to notify the<br />
insured 49 was overturned.<br />
Insisting on strict contractual requirements of proof, as in the case of a theft on holiday<br />
abroad, when adequate evidence of loss was available from other sources 50 was held not<br />
to be fair and reasonable.<br />
6.38 Ambiguous terms 51 , or reliance upon an unreasonable interpretation of a term, expression, or<br />
an exclusion 52 , were also successfully contested under the non statutory Ombudsman scheme between<br />
1992 and 1998.<br />
(8) The PEICL Recommendation<br />
6.39 Article 2:304 of the PEICL is modelled on the 1993 Unfair Contract Terms Directive, 93/13/EC.<br />
The Article has been crafted in order to respond to the specific context of mass marketed consumer<br />
insurance products. Article 2:304 provides:<br />
Abusive Clauses<br />
(1) A term which has not been individually negotiated shall not be binding on the<br />
policyholder, the insured or the beneficiary if, contrary to the requirements of good faith<br />
and fair dealing, it causes a significant imbalance in his rights and obligations arising<br />
under the contract to his detriment, taking into account the nature of the insurance<br />
contract, all the other terms of the contract and the circumstances at the time the contract<br />
was concluded.<br />
(2) The contract shall continue to bind the parties if it is capable of continuing in existence<br />
without the unfair term. If not, the unfair term shall be substituted by a term which<br />
reasonable parties would have agreed upon had they known the unfairness of the term.<br />
(3) This Article applies to terms that restrict or modify cover but it applies neither to<br />
(a) the adequacy in value of the cover and the premium, nor to<br />
(b) terms that state the essential description of the cover granted or the premium agreed,<br />
provided the terms are in plain and intelligible language.<br />
(4) A term shall always be regarded as not individually negotiated when it has been drafted<br />
in advance and the policy holder has therefore not been able to influence the substance<br />
48<br />
49<br />
50<br />
51<br />
52<br />
Digest of Cases 1992-1998.<br />
Case Study 119.<br />
Case Study 84.<br />
Case Studies 3, 83 and 131, for example.<br />
Case Studies 24, 94, 128 and 134, for example.<br />
147
of the term, particularly in the context of a pre-formulated standard contract. The fact that<br />
certain aspects of a term or one specific term have been individually negotiated shall not<br />
exclude the application of this Article to the rest of a contract if an overall assessment of<br />
the contract indicates that it is nevertheless a pre-formulated standard contract. When<br />
an insurer claims that a standard term has been individually negotiated, the burden of<br />
proof in this respect shall be incumbent on the insurer.<br />
(9) Discussion on the Adoption of Article 2:304<br />
6.40 Irish law does not have any statutory provisions that can effectively counteract contractual<br />
provisions that have been included in negotiations or contract documents in an unfair way. While the<br />
common law and the judiciary may strive to protect contracting parties by way of imposing good faith<br />
requirements during the negotiation process, particularly through the rules on incorporation of terms,<br />
there is less room for judicial manoeuvre in cases of substantive unfairness. While clauses may be<br />
subject to hostile interpretation and ambiguities read against an insurer, careful drafting will provide an<br />
insurer with a means of avoiding a claim in some instances. Even though Irish law has a strong tradition<br />
in relation to unconscionable or improvident transactions being overturned, the jurisdiction has not been<br />
employed in the insurance sector. In any event, such equitable doctrines are not appropriate here<br />
because the weaker party will in most cases be seeking to enforce the contract, shorn of the<br />
objectionable provision. Courts of equity do not re-shape unconscionable or improvident transactions, as<br />
a rule.<br />
6.41 The statutory protections available in the Consumer Protection Act 2007 have yet to be tested<br />
in Ireland. It may be that the 2007 legislation, which clearly applies to insurance, may be suitable, but<br />
one cannot be sanguine about this: the <strong>Commission</strong> considers that an appropriate and tailored response<br />
is necessary. The Óireachtas has already recognised that unfair contractual practices in the insurance<br />
sector exist and that both the Financial Regulator and the Financial Services Ombudsman have important<br />
and distinct roles to play in protecting consumers and small businesses. The <strong>Commission</strong> believes that<br />
this can be further developed by making the provisions of Directive 93/13/EC fit more appropriately into<br />
Irish commercial law and the <strong>Commission</strong> believes that the PEICL recommendations provide a very<br />
helpful precedent, one that should be built upon in Ireland.<br />
6.42 It is the view of the <strong>Commission</strong>, looking at the IIF Codes of Practice, as well as the decisions<br />
of the statutory and non statutory dispute resolution bodies that have effectively provided the legal and<br />
regulatory standards that operate in Irish insurance consumer law, that problems of substantive<br />
unfairness are not commonly found. The <strong>Commission</strong> believes that most problems arise out of<br />
difficulties, misunderstandings and isolated instances of bad insurance practice. The onus should rest on<br />
the industry to improve training, enhance information gathering and ensure that customers are better<br />
informed about the product they are considering purchasing. By the same token, insureds should read<br />
and make strenuous efforts to understand the cover being provided. Unfair terms legislation, in the<br />
<strong>Commission</strong>‘s view, is more concerned with ensuring that products are adequately described and that the<br />
insured should obtain the product that is best suited to their requirements. Unfair terms legislation has an<br />
important part to play in matching the buyer with an appropriate product.<br />
6.43 The <strong>Commission</strong> notes that the Draft Consumer Rights Directive, which was intended to<br />
replace Directive 1993/13/EC, contained a reformulated recital, which in the view of the <strong>Commission</strong>,<br />
provides greater clarity on what the Judicial Review provisions intend to achieve. Recital 49 of the Draft:<br />
For the purpose of this Directive, neither the fairness of terms which describe the main subject<br />
matter of the contract, nor the quality/price ratio of the goods or services supplied should be<br />
assessed unless these terms did not meet transparency requirements. The main subject<br />
matter of the contract and the price/quality ratio should nevertheless be taken into account in<br />
assessing the fairness of other terms. For example, in insurance contacts, the terms which<br />
clearly define or circumscribe the insured risk and the insurer‘s liability should not be subject to<br />
such an assessment since these restrictions are taken into account in calculating the premium<br />
paid by the consumer.<br />
148
The ―transparency requirements‖ mentioned in the draft Directive are found in Article 31 53 , and the<br />
general principles 54 outlined in article 32 of the draft Directive are not to apply ―to the assessment of the<br />
main subject matter of the contract provided the trader fully complies with Article 31‖ 55 .<br />
6.44 This reformulation helpfully states that core provisions are immune from review if transparency<br />
requirements are met. To purchase immunity the insurer must meet both the reasonable expectations of<br />
the purchaser and communicate the essential features of the policy to the purchaser. The <strong>Commission</strong><br />
does not think this is too onerous and the <strong>Commission</strong> believes that this is in accordance with good<br />
insurance practice, as well as the Ombudsman jurisprudence since 1992 to date. The adoption of Article<br />
2:304 would, in the <strong>Commission</strong>‘s view, be an important step and the <strong>Commission</strong> would so provisionally<br />
recommend.<br />
6.45 However, the <strong>Commission</strong> suggest that the refinements should be adopted. First of all, the<br />
<strong>Commission</strong> would favour the approach taken in Germany and elsewhere, which narrows down the scope<br />
of the exclusion to terms which describe the insured risk and the premium paid. In other words, a<br />
description of a policy as a ―guaranteed income protection policy‖, or a ―domestic fire insurance policy‖, as<br />
well as the premium to be charged, would be immune from scrutiny. The <strong>Commission</strong> does not think this<br />
will have a significant impact 56 but views on this from the industry are invited. Secondly, the <strong>Commission</strong><br />
would welcome an adjustment to Article 2:304(3) (b) so as to add that the terms ―have been clearly<br />
communicated to the policyholder‖. This is implicit as a result of the fourth indent to Schedule 2,<br />
Guidelines for the Application of the Test of Good Faith 57 , but in the <strong>Commission</strong>‘s view this requirement<br />
should be overtly stated, for the avoidance of doubt.<br />
6.46 The <strong>Commission</strong> provisionally recommends that Regulation 4 of the European Communities<br />
(Unfair Terms in Consumer <strong>Contracts</strong>) Regulations 1995 (which deals with specific circumstances in<br />
which a contract term shall not of itself be considered to be unfair) should be clarified in the context of<br />
insurance contracts so that it is provided, to avoid any doubt, that: (a) a term in an insurance contract<br />
shall not in itself be regard as unfair where the subject matter of the term has actually been considered by<br />
the insurer in the calculation of the premium (price); (b) that this has been drawn to the attention of the<br />
proposer; and (c) that this clarification to Regulation 4 should apply to consumers as defined for the<br />
purposes of the jurisdiction of the Financial Service Ombudsman, namely natural persons and businesses<br />
with an annual turnover not exceeding €3 million.<br />
(10) Enforcement<br />
6.47 The most important feature of Directive 93/13/EC is the fact that it is not merely a private law<br />
mechanism. The role that national consumer regulators play in having terms declared unfair is a critical<br />
part of effective enforcement. A declaration that a particular term is unfair has an effect that goes beyond<br />
the ambit of individual private law adjudication 58 . As the <strong>Commission</strong> recommend that Article 2:304<br />
should be available to small businesses, this raises the question about which State agency should be<br />
able to utilise enforcement powers if, as the <strong>Commission</strong> believe, the same enforcement mechanism be<br />
available to consumer insureds under the Directive. The <strong>Commission</strong> provisionally recommend that the<br />
53<br />
54<br />
55<br />
56<br />
57<br />
58<br />
Draft Article 32(1) is the good faith/significant imbalance provision currently found in S.I. 27/1995.<br />
Draft Article 32(2) sets out the assessment process for the competent national authority, currently found in SI<br />
27/1995.<br />
Draft Article 32(3). Unfortunately for our purposes these provisions were deleted from the Consumer Rights<br />
Directive (Directive 2011/83/EU, 25 October 2011)<br />
Article 2:304(3)(b)arguably already does this.<br />
―The extent to which the seller or supplier has dealt fairly or equitably with the consumer whose legitimate<br />
interests he has to take into account‖. See also Schedule 3(j) (hidden terms) the list of unfair terms which are<br />
presumptively unfair: SI 27 of 1995.<br />
See Bright, ‖Winning the Battle against Unfair Terms‖ (2000) 20 LS 331; See the High Court Order in relation<br />
to the Building industry of December 5, 2001, discussed by Dorgan [2002] <strong>Law</strong> Society Gazette 12, and the NI<br />
Case of Kindlance v Murphy (1997) discussed by Bright, op cit..<br />
149
National Consumer Agency would be the most obvious agency but as the re-organisation is under review,<br />
the <strong>Commission</strong> merely wishes to flag this issue as one that needs to be considered.<br />
150
7<br />
CHAPTER 7<br />
FORMALITIES<br />
A<br />
Introduction.<br />
7.01 Irish law does not provide a coherent set of rules requiring an insurance contract to be<br />
negotiated or concluded in tandem with the creation of a written or electronic record of the transaction. A<br />
fragmented body of EU legislation has built up in relation to consumer insurance but the absence of any<br />
general requirement on pre-contractual information being furnished to a proposer, or the recording of<br />
essential terms of the agreement, as well as any requirement to actually furnish the insured with a copy of<br />
the policy (or key terms such as promissory warranties) are shortcomings in the law that need to be<br />
addressed. The <strong>Commission</strong> is aware of the need to allow flexible contractual practices to operate and<br />
the desirability of keeping transaction costs to a minimum, but these objectives should not be purchased<br />
at the cost of lack of clarity and procedural or substantive fairness.<br />
B<br />
Legislation, Case <strong>Law</strong> and Codes of Practice<br />
7.02 Isolated examples of legislative provisions which seek to promote greater clarity of purpose<br />
and legal certainty between a proposer and an insurer do exist. The <strong>Insurance</strong> Act 1936 in relation to<br />
industrial assurance 1 provides exceptions that prove the rule. While the <strong>Insurance</strong> Act 1989 contained an<br />
enabling provision 2 that would have had a significant impact on pre-contractual negotiations and notice<br />
requirements in respect of the duty of disclosure and warranties, this power was never exercised.<br />
(1) Limited legislative provisions<br />
7.03 The Road Traffic Acts make it necessary for vehicle insurers who issue approved policies on<br />
insurance to issue certificates of insurance in the prescribed form, 3 an understandable provision in<br />
relation to compulsory insurance. Some isolated examples of formal requirements have been identified in<br />
industrial assurances relating to endowment policies, eg funeral expenses, but not only have such<br />
instances been repealed. 4 It appears that in historical terms the interest of Parliament and the Óireachtas<br />
in ensuring that contracts of insurance are evidenced in writing owe much to a desire to create<br />
appropriate targets for stamp duties and levies. 5 Section 22 of the Marine <strong>Insurance</strong> Act 1906 requires<br />
every contract for marine insurance to be expressed in a policy, the policy being capable of being<br />
executed or issued either at the time of the contract or otherwise. Non-compliance renders the contract<br />
of marine insurance inadmissible in evidence. As was shown in Chapter 2, in relation to the insurable<br />
interest requirement, the Life Assurance Act 1774, as extended into Ireland, requires policies of life<br />
insurance to be in writing with the name of the beneficiary on it. This is not however a ―consumer<br />
protection‖ measure – quite the reverse. Lack of clarity and certainty is also not provided via section 2 of<br />
the Statute of Frauds, 1695. The provision in section 2 of the Statute of Frauds, which directs that a<br />
memorandum is necessary in respect of an agreement that is not to be performed within one year from<br />
the making of the agreement has been held to be fully performed on one side by the payment of the<br />
1<br />
2<br />
3<br />
4<br />
5<br />
Eg. s.61 (contents of proposals to contain some specific terms) and 63 (ministerial power to delete or amend<br />
proposal terms)<br />
s.61.<br />
Road Traffic Act 1961 s.66, and SI 14 of 1962, as amended.<br />
Eg Assurance Companies Act 1909, repealed by section 7(2) of the <strong>Insurance</strong> Act 1936.<br />
Existing revenue practice is to raise the levy against premiums: see for example section 26 of the Finance Act<br />
2009.<br />
151
premium, thus taking the contract outside the Statute, even in long term insurance contracts. 6 As<br />
indemnity insurance is normally an annual contract at most, so the question should not arise in any case.<br />
In the case of contracts of indemnity insurance the provision in the Statute that requires a memorandum<br />
in relation to a special promise to answer for the debt, default or miscarriage of another person 7 is also<br />
not relevant 8 because an insurer does not answer for the default of another – the insurer is directly liable<br />
and there is a strong line of Canadian law, for example holding that oral contracts of insurance are<br />
enforceable because of the existence of direct liability. 9<br />
7.04 Some sections of the Irish insurance market have however been identified as ripe for a process<br />
of prescriptive regulation vis-à-vis contractual practices but again, the record of the Oireachtas has been<br />
disappointing. The Health <strong>Insurance</strong> Act 1994, 10 and the Health <strong>Insurance</strong> (Miscellaneous Provisions)<br />
Act 2009 11 make provision for prescribing information that should accompany the health insurance<br />
contract, and health insurance advertising, but no regulations have been made under either Act.<br />
(2) Case law<br />
7.05 Judicial protection of proposers and insureds has been available on an ad hoc basis. In cases<br />
where an insurer does not make use of a ―proposal form with its presumably relevant questions‖ 12 the<br />
duty of disclosure will often be abridged or the duty to make full disclosure waived. In Manor Park<br />
Homebuilders Ltd v AIG Europe Ireland Ltd 13 the failure of the insurer to make reasonable inquiries, issue<br />
appropriate documentation at the pre-contract stage were held to fall short of the good faith obligations<br />
resting upon the reasonably prudent insurer and ―in breach of its duty of uberrimae fidei in failing to<br />
adequately inform itself of the facts and in failing, for improper reasons, to deal fairly with the insured or<br />
consider his interests‖. 14 In the context of this more proactive view of what the insurer must do in order to<br />
keep up the insurer‘s end of the utmost good faith principle, the transfer of information is not asymmetrical<br />
at all. It follows that, if an insurer‘s right to avoid a policy for misrepresentation or non-disclosure can be<br />
lost because of shoddy infomation gathering practices, the insurer has as much to lose by breaching this<br />
good faith principle as does the proposer. In this context, legal rules to regulate information transfers and<br />
secure compliance with requirements of form should be mutually beneficial to proposer and insurer.<br />
(3) Self Regulation and Formalities<br />
7.06 The insurance industry recognises the importance of good information gathering practices and<br />
using documents to communicate with consumers. Both the IIF Code of Practice on Life Assurance–Duty<br />
of Disclosure, and the Code of Practice on Non Life <strong>Insurance</strong> set out a limited number of obligations that<br />
are relevant. These include a requirement to advise proposers of the consequences of failure to disclose<br />
all material circumstances, to be included in the declaration or prominently displayed elsewhere. Also,<br />
matters which insurers have commonly found to be material should, insofar as practicable, be the subject<br />
of clear questions in proposal forms. These Codes do not however provide any guidance on the<br />
6<br />
7<br />
8<br />
9<br />
10<br />
11<br />
12<br />
13<br />
14<br />
Miles v New Zealand Alford Estate Co. (1886) 32 Ch. 266<br />
On contracts of surety and indemnity see Corbin, ―<strong>Contracts</strong> of Indemnity and the Statute of Frauds” 41 Harv.<br />
L.R. 689 (1941). There is a conceptual difficulty raised by contracts of guarantee – see ICB plc v <strong>Insurance</strong><br />
Corporation of Ireland [1991] ILRM 726.<br />
Section 2 of the Statute of Frauds Ireland 1695 remains in respect of contracts not to be performed within one<br />
year and contracts of guarantee – for land contracts see now section 51 of the Land and Conveyancing <strong>Law</strong><br />
<strong>Reform</strong> Act 2009 and Schedule 2 thereof.<br />
Hochbaum v Pioneer <strong>Insurance</strong> Co [1933] 1 WWR 403; Gayditch v Mutual Benefit Health and Accident<br />
<strong>Insurance</strong> [1940] 4 DLR 236; Gillies v Brown (1961) 53 SCR 557.<br />
Section 13.<br />
Section 11.<br />
Per McCarthy J. in Aro Road & Land Vehicle v ICI [1986] IR 403.<br />
[2008] 2 ILRM 190.<br />
Per McMahon J, at p.216.<br />
152
provision of policy documents as a mandatory requirement. The Code of Practice on Life <strong>Insurance</strong> Duty<br />
of Disclosure, for example states:<br />
7.07 The proposal form or a supporting document should include:<br />
i) a statement that a copy of the completed proposal form is available on written request by<br />
or on behalf of the proposer within 3 months from date of proposal;<br />
ii) a statement that a copy of the completed proposal form will be supplied to the proposer<br />
as part of the insurer‘s normal practice.<br />
7.08 The Codes of Practice also suffer from the fact that these provisions involve the aspirational<br />
―should‖ rather than ―will‖ or ―shall‖, as found in other parts of the Code.<br />
7.09 The Financial Regulator‘s Consumer Protection Code 2012 contains a number of<br />
documentation requirements in the Common Rules for all Regulated Entities. For example, Terms of<br />
Business detailing information about the insurer‘s business must be drawn up and provided to the<br />
consumer prior to the first provision of a service to the consumer: information provided must be ―clear and<br />
comprehensible, and that key items are brought to the attention of the consumer‖.<br />
7.10 The experiences of the Office of the <strong>Insurance</strong> Ombudsman of Ireland also attest to the<br />
importance of efficient pre-contract information gathering on both sides and the usefulness of contractual<br />
formalities. Even in cases where an insurer had grounds for treating the contract as void ab initio or<br />
voidable for non-disclosure or misrepresentation, the failure of the insurer to record the usefulness of the<br />
contract itself or document the information requested or provided by the proposer could lead to the<br />
contract being enforceable or the subject of a proportional payment or ex gratia award. 15<br />
7.11 In the context of the statutory jurisdiction of the Financial Services Ombudsman, there are<br />
instances where the Ombudsman has intervened to protect consumers in cases of misselling and lack of<br />
understanding of a policy, even where the appropriate documentation and a cooling off period have been<br />
provided. 16 Where the documentation provided was said to have been so complex that ―one would have<br />
had to have a considerable amount of financial literacy to follow the terms and conditions within it and the<br />
case had a strong element of misselling, the Financial Services Ombudsman decided upon making a<br />
pro rata allocation of liability. 17 A fortiori, where incorrect statements of cover, at odds with the policy<br />
itself have been made in correspondence, the Financial Services Ombudsman has made decisions<br />
favouring compensatory awards to insureds. 18<br />
7.12 This question of how to develop best practice standards in relation to ―fixing‖ the actual<br />
contract involves also verbal agreements.<br />
7.13 In one important complaint a consumer was sold an insurance policy which was described by<br />
sales personnel as a personal accident policy. Three weeks later the insured suffered fractures to both<br />
his arms as a result of a workplace accident. The policy in question only covered permanent disability or<br />
death. The policy was sold over the telephone as a result of a ―cold call‖ made by the insurer‘s sales staff<br />
to the consumer who had obtained the consumer‘s contact details via a credit card issued by the insurer,<br />
a bank. The policy documents were issued 10 months after the contract was concluded. Recordings of<br />
the telephone conversation were not available. The Financial Services Ombudsman said the case was<br />
one in which the policy was mis-described and that it was unacceptable that no record was available as to<br />
what had transpired at the time of sale:<br />
―The Ombudsman is conscious that many contracts and indeed other issues are carried out on<br />
line and over the ‗phone. In those circumstances he pointed out to all Financial Service<br />
Providers that where he is dealing with a complaint that hinges on contractual commitments<br />
entered into over the ‗phone, he would be disposed to find in favour of a Complainant where<br />
15<br />
16<br />
17<br />
18<br />
Eg Digest Case Studies 8, 12, 31, 43, 45, 49 and 69 in the period 1992 to 1998.<br />
July 2009 Complaints, pages 13-14. ‗Company ordered to purchase back investment‘.<br />
June 2008 Complaints, pages 10-11.<br />
June 2006 Complaints, page 7.<br />
153
the Provider could not provide the necessary evidence to rebut the claim being made. It would<br />
therefore be in the interests of the Providers to consider retaining appropriate records –<br />
including, where necessary, ‗phone recordings relating to such contractual commitments – for<br />
the period within which a person can complain to the Ombudsman i.e. six years.‖ 19<br />
(4) EU law and Formalities<br />
7.14 The First Council Directive of 24 July 1973 on Direct <strong>Insurance</strong> other than Life Assurance<br />
(Directive 1973/239/EEC) as amended, 20 and Directive 2002/83/EC concerning Life Assurance, 21 provide<br />
the main regulatory provisions that have an impact on how insurance companies are to meet Community<br />
transparency standards generally. However, while Directive 2001/83/EC provided detailed provisions in<br />
Chapter 4 (Contract <strong>Law</strong> and Conditions of Assurance) on cancellation rights and information to be<br />
provided to policy holders in relation to life assurance, it is only the Distance Marketing of Consumer<br />
Financial Services Directive 22 that provides a horizontal set of information disclosure requirements and a<br />
cancellation right for consumers in respect of financial services; the Directive specifically defines a<br />
financial service to include an insurance business and insurance is defined so as to include life<br />
assurance. As a basic rule the information to be provided must:<br />
have a commercial purpose which is made clear;<br />
be provided in a clear and comprehensible manner appropriate to the means of distance<br />
communication used;<br />
with due regard, in particular, to the principles of good faith in commercial transactions;<br />
satisfy principles governing the protection of persons unable to give their consent, such as<br />
minors. 23<br />
7.15 The Directive has been transposed into Irish law by the European Communities (Distance<br />
Marketing of Consumer Financial Services) Regulations 2004 (S.I. No. 853 of 2004) and Schedule 1 of<br />
the 1994 Regulations provides that the supplier must provide a consumer with the following information<br />
prior to entry into a distance contract:<br />
(a) identity, main business and address of the supplier;<br />
(b) if the consumer resides in another Member State, name and address of the supplier‘s<br />
representative in that State;<br />
(c) name and address(es) of the advisor or agent with whom the consumer may be<br />
dealing and a statement of capacity;<br />
(d) the supplier‘s registered company details, if applicable;<br />
(e) details of any relevant supervisory authority under any applicable authorisation<br />
scheme;<br />
(f) details of any membership of a professional body regulated by law;<br />
(g) VAT registration details;<br />
(h) a description of the main characteristics of the financial service;<br />
(i) total price payable including fees;<br />
(j) a relevant notice about risks and performance fluctuations;<br />
19<br />
20<br />
21<br />
22<br />
23<br />
Case 5, December 2007. See also Case 9 of June 2007.<br />
See the Consolidation of 2007- 01- 01 on EUR – LEX.<br />
OJL 345, 19.12.2002, building on Directives 1979/267/EEC, 1009/619/EEC and 92/96/EEC. The principal<br />
regulations transposing the life assurance directives are SI 360 of 1994.<br />
2002/65/EC, OJL 271, 9.10.2002.<br />
Directive, Article 2(2).<br />
154
(k) possible additional taxes and costs;<br />
(l) limitations on the accuracy of information provided;<br />
(m) arrangements for payment and performance;<br />
(n) additional charges for use of a means of distance communication;<br />
(o) availability of cancellation rights and details relating thereto;<br />
(p) minimum length of the service where it is of a recurring nature;<br />
(q) early or unilateral termination details and charges;<br />
(r) instructions on exercise of the right to cancel the contract;<br />
(s) details of the applicable law selected by the supplier on the issue of establishing<br />
relations with the consumer;<br />
(t) any term in the contract on applicable law/jurisdiction;<br />
(u) language(s) in which contract details will be given;<br />
(v) language(s) in which supplier will communicate with the consumer during currency of<br />
the contract;<br />
(w) availability of access to out of court redress mechanisms for the consumer;<br />
(x) details on guarantee funds or other compensation agreements.<br />
7.16 In addition, Schedule 2 to the 2004 Regulations sets out a number of information requirements<br />
to be met before entering into a distance marketing contract by telephone. There are five categories of<br />
information relating to the identity of the supplier or any intermediary in contact with the customer, a<br />
description of the main characteristics of the service, total price and taxes, or a means of calculating<br />
price, details of taxes or charges, and details of any available cancellation right.<br />
7.17 Apart from these provisions, another set of information requirements must be met when<br />
electronic commerce rules are applicable. Most Irish consumers will have some familiarity with data<br />
protection rules that prohibit email spamming and unsolicited SMS messages to promote goods and<br />
services, but there are other rules of a Community origin.<br />
7.18 In accordance with the Electronic Commerce Directive, the European Communities (Directive<br />
2000/31/EC) Regulations 2003 24 contain obligations which a service provider using an electronic means<br />
to communicate with consumers, must observe if the service provider is to lawfully engage in ecommerce<br />
activities. These obligations will apply to insurance companies that respond to requests for information<br />
from individuals and individual proposers and the overlap with the distance marketing of consumer<br />
financial services is significant. In fact, the European Communities (Distance Marketing of Consumer<br />
Financial Services) Regulations 2004 25 expressly provide that a distance contract for the supply of a<br />
financial service is subject to regulations 13 and 14 of the Electronic Commerce Regulations as well as<br />
the Distance <strong>Contracts</strong> Regulations.<br />
7.19 Regulation 13 of the Electronic Commerce Regulations provide that where a contract is to be<br />
concluded by electronic means, the relevant service provider shall ―clearly, comprehensively and<br />
unambiguously and prior to the order being placed‖ provide information on the necessary technical steps<br />
needed to conclude the contract, whether the contract will be filed and whether it will be accessible, the<br />
technical means whereby input errors may be identified and corrected prior to the order being placed, and<br />
the language or languages in which the contract may be concluded. The service provider must provide<br />
the recipient of the service with terms and general conditions prior to contract in a way that allows the<br />
recipient to store and reproduce them, and information on any applicable code of conduct must also be<br />
made available prior to an order being placed or as soon as practicable thereafter. While there are<br />
24<br />
25<br />
SI No. 68 of 2003.<br />
SI No. 853 of 2004.<br />
155
exceptions to these requirements in respect of business to business and individual electronic<br />
negotiations, these regulations do add a significant layer of additional regulation for service providers.<br />
7.20 To similar effect, regulation 14 stipulates that where an order is placed by the recipient through<br />
electronic means:<br />
―the relevant service provider shall acknowledge the receipt of the order of the recipient without<br />
undue delay and by electronic means‖<br />
and further, information on correcting input errors must also be provided. There are again exceptions in<br />
respect of business to business and individualised electronic negotiations.<br />
7.21 What is particularly significant about articles 13 and 14 is the fact that non-compliance may<br />
result in criminal liability, with the National Consumer Agency having powers to prosecute non-compliant<br />
service providers. Non-compliance with these requirements does not have any negative impact on the<br />
enforceability of any contract concluded in breach of these provisions.<br />
7.22 It is not clear what plans the European <strong>Commission</strong> have in relation to the Distance Selling of<br />
Financial Services Directive which is not supplanted by the recently agreed Consumer Rights Directive,<br />
Directive 2011/83/EU.<br />
(5) EU <strong>Law</strong> – Cancellation Rights in relation to Life Assurance <strong>Contracts</strong> concluded by a<br />
Distance Contract<br />
7.23 With effect from 9 October 2004 any life assurance policies issued on or after that date are the<br />
subject of a 30 day cancellation right which is vested in the policyholder. 26 Prior to that date, the<br />
cancellation right was limited to 15 days. 27<br />
7.24 In the case of other distance contracts for the supply of financial services, the cancellation right<br />
ends 14 days after the beginning of the cancellation period. 28 The right of cancellation does not apply to<br />
certain insurance contracts, specifically if the service is or relates to a travel or baggage insurance policy<br />
or an insurance policy under which cover is provided for less than a month. 29<br />
(6) Pre-Contractual Information and Formalities in incentivising Best Practice Standards<br />
7.25 Insurers do not have any general requirement to satisfy any common law rules on the accurate<br />
recording of negotiations and reducing contracts into documentary form: statute law, outside of a number<br />
of EU directives is also less than prescriptive. However, there are good commercial and ethical reasons<br />
why sound documentary practices should be devised and adhered to. MacGillivray cautions:<br />
―There is nothing to prevent a valid contract of fire, accident or burglary insurance being<br />
constituted by informal writing or correspondence or even by mere oral communications. In<br />
practice, however, it is difficult to satisfy a court that there is an oral contract when one party<br />
disputes its existence, and attempts to set up such an agreement are not to be undertaken<br />
lightly. The small trouble involved in recording contracts in writing is amply justified to avoid<br />
later evidentiary difficulties. When an informal contract is recorded in writing, the written terms<br />
are not necessarily a conclusive statement of the contract in law, because oral evidence is<br />
admissible to prove other terms of the contract, if it is established that the document was not<br />
intended to be a complete record of it.‖ 30<br />
26<br />
27<br />
28<br />
29<br />
30<br />
SI No. 543 of 2004, giving effect to Directive 2002/65/EC, article 6, supplanted by Regulation 11(5) of SI No.<br />
853 of 2004.<br />
SI No. 360 of 1994, giving effect to Directive 90/619/EC, article 15.<br />
Regulation 11(4) of SI No. 853 of 2004. The recently agreed Consumer Rights Directive 2011/83/EC (25 th<br />
October 2011) does not apply to financial services contracts and will not affect the existing law.<br />
Regulation 12(1)(b) of SI No. 853 of 2004.<br />
Para. 3-002 (footnotes omitted). See para 7.13 above.<br />
156
7.26 One may also add that considerations of good faith may also be breached by negligent or<br />
unsatisfactory business practices that attend the negotiation and recording of insurance contracts and<br />
policy documents.<br />
(7) A General Duty to Provide Pre-Contractual Information in PEICL<br />
7.27 The European Union acquis imposes significant information requirements on the suppliers of<br />
goods and services, particularly when the good or the service is provided via distance marketing or away<br />
from business premises. These requirements only apply to consumers however, and, apart from the<br />
information and cancellation rights in respect of life assurance, any insurance contract which is not<br />
concluded within the distance contracts regulations, are not attended by information disclosure rules or a<br />
legal duty to provide copies of completed documentation or any policy documents, save in respect of<br />
some applicable law provisions and dispute resolution mechanisms under Article 31 of Directive<br />
1992/49/EEC. 31<br />
7.28 In the interests of greater clarity and transparency, the <strong>Commission</strong> takes the view that there<br />
should be a general duty to provide proposers with pre-contractual information, and, in the event that a<br />
contract is concluded, copies of any completed documentation and policy documents. This general duty<br />
should arise in relation to all consumer and business insurance contracts that are the subject matter of<br />
this Consultation Paper. A number of exceptions to this general duty will be necessary for when such<br />
requirements are inappropriate or would have a disproportionate impact upon the insurer or insurance<br />
sector concerned. The general duty and related matters, as well as the exceptions hereto, are based<br />
upon the recommendations contained in the Principles of European <strong>Insurance</strong> Contract <strong>Law</strong>, to which the<br />
<strong>Commission</strong> will now turn.<br />
7.29 The authors of the PEICL distinguish between information duties that arise before the contract<br />
is concluded (Article 2:201) and a separate duty to issue an insurance policy after the insurance contract<br />
has been concluded (Article 2:501).<br />
7.30 Article 2:201 is also tailored to aspects of the specific insurance contract such as the sum<br />
insured and the amount of the premium. While the Article begins by referring to a copy of the proposed<br />
contract terms as well as a document containing the following information, if relevant, the proposed<br />
contract terms requirement is to be satisfied if the document is in writing, is readable by both sides.<br />
Article 2:201 reads:<br />
(i) The insurer shall provide the applicant with a copy of the proposed contract terms as<br />
well as a document which includes the following information if relevant:<br />
(a) the name and address of the contracting parties;<br />
(b) the name and address of the insured and of the beneficiary;<br />
(c) the name and address of the insurance agent;<br />
(d) the subject matter of the insurance and the risks covered;<br />
(e) the sum insured and any deductibles;<br />
(f) the amount of the premium or the method of calculating it;<br />
(g) when the premium falls due as well as the place and mode of payment;<br />
(h) the contract period and the liability period;<br />
(i) the right to revoke the application or avoid the contract in accordance with Article<br />
2:303;<br />
(j) the law applicable to the contract or, if a choice of law is permitted, the law proposed<br />
by the insurer;<br />
(k) the existence of an out-of-court complaint and redress mechanism for the applicant<br />
and the methods for having access to it;<br />
31<br />
See the Consolidation of the Directives (21.03.2008) on EUR-LEX.<br />
157
(l) the existence of guarantee funds or other compensation arrangements.<br />
(ii) If possible, this information shall be provided in sufficient time to enable the applicant<br />
to consider whether or not to conclude the contract.<br />
(iii) When the applicant applies for insurance cover on the basis of an application form<br />
and/or a questionnaire provided by the insurer, the insurer shall supply the applicant with<br />
a copy of the completed documents.<br />
7.31 It should be noted that Article 2:201 sets out some generic provisions and that the requirement<br />
is imposed only ―if relevant‖. While some of this information will need to be tailored to meet the<br />
requirements of each proposed contract (e.g. risks and exclusion, premiums, details of the insured and<br />
beneficiary) <strong>Commission</strong> sees no reason why most of these information requirements could not be met<br />
via basic provisions on a website followed by way of an SMS message/email, as long as the text is<br />
retrievable and/or printable.<br />
7.32 Article 2:201(2) raises the question of what consequences will follow if the information<br />
provision is not met when it would have been possible for the insurer to have done so had the insurer<br />
acted in a professional and timely manner. This issue arose in the context of the transposition of the<br />
Distance Marketing of Consumer Financial Services Directive. The 2004 Regulations, S.I. No. 853 of<br />
2004 originally provided that non-compliance with the information requirements and contract terms<br />
provisions made the contract unenforceable against the consumer. S.I. No. 63 of 2005 gave a court of<br />
competent jurisdiction a power to dispense with the obligation where non-compliance was not deliberate<br />
or prejudicial to the consumer, the court having the ability to make the contract subject to such conditions<br />
as the court sees fit to impose. This seems to be a more appropriate response and it is arguable that the<br />
Financial Services Ombudsman‘s jurisdiction should be extended to allow such matters to be within the<br />
remit of the Office rather than requiring an application to a court of competent jurisdiction.<br />
7.33 Article 2:201(3), as the authors of the PEICL concede, is not based upon the Community<br />
acquis but is rooted in a number of national law provisions 32 that requires such details that have been<br />
provided by the proposer to be furnished, in documentary form, not later than the time when the contract<br />
has been concluded.<br />
7.34 Clearly, the authors of the PEICL are correct when they point out that any application form or<br />
questionnaire will be ―of decisive evidential value for ex post determination of the contents of the<br />
concluded insurance contract or a possible breach of the applicant‘s pre-contractual information duty‖. 33<br />
However, while the duty must be observed whenever possible, there must be some question about<br />
whether it is practicable to require this information to be furnished prior to the conclusion of the contract.<br />
C<br />
Recommendations<br />
7.35 While the Community acquis in relation to consumer insurance in particular contains a number<br />
of information requirements, there is no basic rule that provides that a contract must be concluded, or<br />
evidenced, in writing. As the authors of the PEICL point out, the core issue is whether the parties have<br />
reached an agreement. Also, ―it is important and socially desirable that insurance cover can be put in<br />
place as quickly as possible after the decision of the applicant to apply for insurance and the agreement<br />
of the parties. Observance of formalities will cause delay.‖ 34<br />
(1) No written requirements<br />
7.36 The fact that no requirements as to form exist a fortiori precludes specific rules as to the means<br />
whereby a contract is concluded. In such a context, the ordinary rules of offer and acceptance, for an<br />
identifiable consideration, will apply. In Kennedy v. London Express Newspapers 35 an advertisement in a<br />
32<br />
33<br />
34<br />
35<br />
See PEICL, pages 95-6 for details.<br />
PEICL, page 93.<br />
PEICL, page 104.<br />
[1931] IR 532: see also London v Accident <strong>Insurance</strong> Co (1904) 43 ILTR 271.<br />
158
newspaper giving readers the benefits of insurance cover was held to have led to a concluded contract<br />
when the reader completed a document providing the Daily Express with details of registration by way of<br />
a letter posted in Dublin. No actual registration mechanism formed a part of the means of concluding the<br />
contract.<br />
7.37 A similar degree of flexibility is expected of the judiciary when doubts arise about the terms<br />
upon which the contract has been concluded. An offer to take out standard insurance from a specific<br />
insurer will impliedly constitute a willingness to contract on the insurer‘s usual terms of cover: Sanderson<br />
v. Cunningham. 36 Where performance of the contractual obligations in respect of which insurance cover<br />
is sought has begun, the fact that no contract documentation has been issued is irrelevant. 37 As long as<br />
any subsequent documentation is in accordance with any verbal assurances and the usual terms, the<br />
formal documents will be operative. It may of course not be possible to adduce parol evidence to add to,<br />
vary or contradict the usual terms of cover. 38 Any contract documentation that seeks to delay the<br />
commencement of a contract until a stated event such as the payment of the first premium 39 or the<br />
delivery of the policy 40 may however negative a contract on the basis that until delivery of the premium or<br />
the policy, as the case may be, there is no animus contrahendi and the event will be viewed as condition<br />
precedent to the existence of the contract.<br />
7.38 Where an insurance contract is concluded on the basis of a mistake, the question whether the<br />
mistake is operative is determined by the standard rules of common law and equity, 41 including those<br />
applicable to the remedy of rectification. 42<br />
7.39 These factors persuade the <strong>Commission</strong> that there is no need to introduce a formalities<br />
requirement into Irish law. For the sake of greater clarity on this question, the position of the authors of<br />
the PEICL on this point, should be adopted. Article 2:301 provides, under the heading, ―manner of<br />
conclusion‖:<br />
―An insurance contract shall not be required to be concluded or evidenced in writing nor subject<br />
to any other requirement as to form. The contract may be proved by any means, including oral<br />
testimony.‖<br />
7.40 The <strong>Commission</strong> provisionally recommends that legislation should provide that it is not a<br />
necessary pre-condition to the validity of an insurance contract that it be in writing. The contract may be<br />
proved by any means, including oral testimony.<br />
(2) The Provision of a Policy Document<br />
7.41 While the <strong>Commission</strong> does not see any need for rules requiring a contract to be concluded or<br />
evidenced in writing, a general requirement that the policy itself should be provided to the insured, along<br />
with the contractual details that must be furnished prior to the conclusion of the contract, seems to be<br />
unobjectionable as a general principle. The authors of the PEICL provide in Article 2:501 that the policy,<br />
and the twelve items listed in Article 2:301 (insofar as they are not included in the policy) should be<br />
issued to the proposer ―when concluding the insurance contract‖.<br />
7.42 On the assumption that the insurer has provided the pre-contractual information in a timely<br />
manner, the question that arises is whether the obligation to issue the policy document should be<br />
contemporaneous with the conclusion of the contract, as the PEICL envisages. This is, in the view of the<br />
<strong>Commission</strong>, a rather onerous obligation, particularly in sectors where preliminary cover is sought or<br />
documents need to be prepared or reviewed. For this reason, the <strong>Commission</strong> would suggest that the<br />
36<br />
37<br />
38<br />
39<br />
40<br />
41<br />
42<br />
[1919] 2 IR 234.<br />
Slattery v CIE (1972) 106 ILTR 71.<br />
S.E. Lancs <strong>Insurance</strong> Co. v. Croisdale (1981) 40 Lloyd‘s Rep. 22.<br />
Canning v Farquhar (1886) 16 QBD 727.<br />
See MacGillivray, para. 2-048.<br />
Stapleton v Prudential Assurance (1928) 62 Ll LR 56: Kyle Bay Ltd v Underwriters [2007] EWCA Civ 57.<br />
Eg Irish Life Assurance Co v Dublin Land Securities [1989] IR 253.<br />
159
policy should be issued within fifteen working days of the contract being concluded. This requirement will<br />
be important when seen in the light of the cooling off period, considered below.<br />
7.43 The <strong>Commission</strong> provisionally recommends that, subject to a cooling-off period (if any), the<br />
insurer should transmit the insurance policy document to the insured within fifteen working days of the<br />
contract being agreed.<br />
(3) A Right of Withdrawal or Cooling Off Period<br />
7.44 The Distance Marketing of Financial Services Regulations 43 currently provides a cooling off<br />
period of 14 days for financial services, save in respect of life assurance which is set at 30 days. Cooling<br />
off periods are a feature of the broader Community contract acquis and the 2011 Consumer Rights<br />
Directive 44 seeks to harmonise the right of withdrawal to a standard period of 14 days. The Distance<br />
Marketing of Financial Services Regulations however contain a provision postponing the commencement<br />
of the cancellation right until the pre-contract requirements for financial services are complied with:<br />
Regulation 11(6).<br />
7.45 The authors of the PEICL suggest that a right of withdrawal or cooling off period should apply<br />
generally, and the proposed text is found in Article 2.303.<br />
―(1) The policyholder shall be entitled to avoid the contract by giving written notice within two<br />
weeks after receipt of acceptance or delivery of the documents referred to in Article 2:501,<br />
whichever is the later.<br />
(2) The policyholder shall not be entitled to avoid the contract when<br />
(a) the duration of the contract is less than one month;<br />
(b) the contract is prolonged under Article 2:602;<br />
(c) it is a case of preliminary insurance, liability insurance or group insurance.‖<br />
7.46 The authors of the PEICL acknowledge that the Distance Marketing of Financial Products<br />
Directive is the source of this obligation, although the right to avoid the contract under that Directive is<br />
only displaced by short term insurance policies of less than one month. 45 The other exceptions contained<br />
in Article 2.303(2)(b) and (c) of PEICL are specifically required so as to provide that a new policy or in<br />
cases where preliminary cover (e.g. on foot of a cover note) or the policy is effected in order to protect<br />
third parties by way of liability insurance and group insurance.<br />
7.47 The <strong>Commission</strong> recognises that the extension of a right of withdrawal from the specific<br />
circumstances provided for in the Community acquis is a radical step that might have a significant impact<br />
upon all sectors of the Irish insurance market. Such a universal right of withdrawal might not be in the<br />
best interests of the insured, particularly when the insured has been provided with detailed information on<br />
the essential nature of the contract prior to conclusion of the contract, as well as a copy of the actual<br />
policy, post hoc. However, it is possible to argue that a right of withdrawal is the logical conclusion to be<br />
drawn from those pre-existing rights to information and policy documentation. The vast majority of<br />
insureds will not exercise a right of withdrawal.<br />
(4) The PEICL and Notices to be provided by and to the Insurer<br />
7.48 The PEICL however is quite prescriptive in relation to notices, most of which are specifically<br />
required to be in writing. For example, written notice of an intention to vary or terminate a contract for<br />
breach by the applicant of the duty to inform the insurer of circumstances must be given within one month<br />
of the breach being known. 46 Notice of avoidance for the fraud of a policyholder must also be given in<br />
43<br />
44<br />
45<br />
46<br />
SI No. 853 of 2004.<br />
The Consumer Rights Directive does not have any application to the Distance Marketing of Financial Services<br />
Directive.<br />
See Article 6(2)(b) – ―travel and baggage insurance policies or similar short term insurance policies of less<br />
than one month‘s duration‖.<br />
PEICL, Article 2:102(1).<br />
160
writing within 2 months of the fraud becoming known to the insurer. 47 Protection against unilaterally<br />
imposed changes in respect of an application for cover and the policy document are also provided via a<br />
requirement that differences in the policy should be both highlighted in the policy and by notice in bold<br />
print of the right to object to changes. 48 A general duty to provide a policyholder with information, without<br />
undue delay, of all matters relevant to the performance of the contract requires that the policyholder‘s<br />
request, and the information in question, must be in writing. 49 Termination rights for non-compliance with<br />
precautionary measures must also be effected via a written notice to the policyholder within one month of<br />
non-compliance becoming known to the insured 50 and termination for non payment of premiums also<br />
contain invoicing and documentation rights under PEICL, Article 5, and notice of an insured event<br />
occurring also envisage notice within a stated and reasonable period of time, not being shorter than 5<br />
days. 51<br />
7.49 The <strong>Commission</strong> considers that these extremely detailed rules are too prescriptive and would<br />
not favour their adoption other than in the form of best practice guidelines. The <strong>Commission</strong> would favour<br />
less prescriptive rules and takes note of the existing consumer protection legislation, in particular, the<br />
European Communities (Distance Marketing of Consumer Financial Services) Regulations 2004 52 .<br />
Schedule 1 and 2 of the 2004 Regulations provide comprehensive lists of what information and notices<br />
must be given to a consumer before entering into a distance contract for the supply of financial services.<br />
While it may be necessary to tailor these regulations to address specific issues that arise in relation to<br />
insurance contracts, they do provide useful and clear guidance for any proposed legislation governing<br />
insurance contracts.<br />
7.50 The <strong>Commission</strong> provisionally recommends that legislation should provide that insurance<br />
contracts be subject to prescribed requirements of notices, notification and forms that are comparable to<br />
those already found in existing consumer protection legislation, such as the European Communities<br />
(Distance Marketing of Consumer Financial Services) Regulations 2004. The <strong>Commission</strong> also<br />
provisionally recommends that legislation should include a statutory duty on insurers to provide a<br />
proposer with the prescribed requirements of notices, notification and forms. The <strong>Commission</strong> invites<br />
submissions on the precise nature and content of such prescribed requirements.<br />
(5) How Information is to be provided<br />
7.51 Irish law is also not very clear in relation to prescriptive rules on the presentation of information,<br />
as distinct from detailing what must be disclosed. 53 The Financial Regulator‘s Consumer Code does have<br />
a number of provisions requiring, for example, information to consumers to be ―of a print size that is<br />
clearly legible. 54 The Code requires that insurance warranties and endorsements set out in quotation<br />
documents ―must not be detailed in smaller print than other information provided in the documents‖.<br />
7.52 The <strong>Commission</strong> considers that the question of how consumers are informed about the policy<br />
under negotiation is of critical importance. In this regard, the work of the Australian <strong>Law</strong> <strong>Reform</strong><br />
<strong>Commission</strong>, undertaken nearly 30 years ago, remains important. While the ALRC ultimately decided<br />
against prescribing binding rules on print size, legibility, and plain English in the draft <strong>Insurance</strong> Act, the<br />
ALRC did suggest that a standard of legibility ―should be prescribed by regulation‖. 55 The Report also<br />
47<br />
48<br />
49<br />
50<br />
51<br />
52<br />
53<br />
54<br />
55<br />
PEICL, Article 2:104.<br />
PEICL, Article 2:502(1).<br />
PEICL, Article 2:702(2).<br />
PEICL, Article 2:102(2).<br />
PEICL, Article 2:101(1). This does not involve documentary notice but the ―stated‖ element suggests some<br />
contractual agreement on such a key point.<br />
SI No. 853 of 2004<br />
<strong>Insurance</strong> Act 1936, s.61: Sale of Goods and Supply of Services Act 1980, s.52(1).<br />
Whether illegibility can vitiate a policy term was considered in Koskas v Standard Marine <strong>Insurance</strong> Co (1926)<br />
25 U.L. Rep. 363. The case is inconclusive on the point.<br />
Report No. 20, <strong>Insurance</strong> <strong>Contracts</strong> para. 38.<br />
161
contains interesting and helpful advice on comprehensibility. 56 The <strong>Commission</strong> has noted that a<br />
considerable amount of work has gone into the broader question of how electronic media can be used in<br />
order to meet the needs of contracting parties, both in general commercial transactions and within the<br />
insurance sector. Legislation in the insurance sector is already in the process of being enacted in<br />
Australia and some Canadian Provinces. The <strong>Commission</strong> consider that an Irish initiative on this<br />
important topic would be timely for customers and commercially valuable to the Irish insurance industry.<br />
(6) Information on Renewal: Information upon refusal of a proposal?<br />
7.53 There are specific provisions in Irish statute law that require an insurer to provide information<br />
upon renewal of a policy which are intended to allow the insured to ―shop around‖ for cover. 57 While there<br />
are no express statutory obligations requiring an insurer to explain the grounds upon which a decision to<br />
decline a proposal or to renew a policy exists, this situation is one that causes considerable difficulties for<br />
a proposer. It may be, for example, that a proposal has been declined or a renewal refused for<br />
organisational or underwriting considerations that are unrelated to the risk in question. Yet if the proposer<br />
fails to disclose that a proposal has been declined or the proposer gives an incorrect answer, even if the<br />
proposer genuinely and in good faith believes that such an event is of no significance, there may be<br />
grounds upon which a subsequent claim can be avoided for non-disclosure or misrepresentation. One<br />
way to avoid such circumstances can be provided by imosing or implying a duty to provide the proposer<br />
with a general statement explaining the decision to decline a proposal. In the absence of some express<br />
undertaking, Irish law does not impose upon insurers a general duty to explain why a proposal has been<br />
declined or an expiring policy will not be renewed. In Carna Foods Ltd v Eagle Star <strong>Insurance</strong> Co 58 the<br />
Supreme Court refused to imply a business efficacy implied term into a contract of insurance when the<br />
insurer decided not to renew a policy on the basis that the contract did not need such a term for it to<br />
function adequately. Clearly the Supreme Court was concerned about how the scope of such a term<br />
could be framed and enforced.<br />
7.54 Efforts have also been made to take the implied term a step further by arguing that the Medical<br />
Defence Union has a duty to afford professional indemnity insurance and these too have failed. 59<br />
7.55 The disgruntled applicant might be able to resort to making a data protection request but in the<br />
light of English case-law it is by no means clear that such a request will be successful. In Johnson v<br />
Medical Defence Union 60 a majority of the Court of Appeal, via a highly artificial process of reasoning<br />
indicated that no processing of personal data had taken place so no relevant fair processing principle had<br />
been breached. It is clear that the Data Protection principles were not intended for the kind of use to<br />
which Dr Johnson sought to employ them, and it is clear that Dr Johnson at least was given an<br />
explanation about why his professional indemnity insurance was being withdrawn. Other applicants are<br />
not so fortunate and it is the generality of proposers that the <strong>Commission</strong> is concerned with.<br />
7.56 This question appears to be a controversial one in Ireland at the present time. The<br />
Commisssion do acknowledge the arguments against any requirement to provide information in cases<br />
where the reasons for declining to renew cover are based upon confidential information or sensitive data<br />
that it would not be appropriate for the insured to have access to; however, the <strong>Commission</strong> would like to<br />
open up a debate on whether there are situations in which reasons for refusal are provided by insurers<br />
under existing best practice standards and the <strong>Commission</strong> invites submissions on this matter.<br />
56<br />
57<br />
58<br />
59<br />
60<br />
See also Case Studies 22 and 65 of The <strong>Insurance</strong> Ombudsman, 1992-1998.<br />
Non-Life <strong>Insurance</strong> (Provision of Information)(Renewal of Policy of <strong>Insurance</strong>) Regulations 2007 (SI No. 74 of<br />
2007): 15 day notice of renewal of a policy and the terms of renewal and a no claims bonus certificate for<br />
motor insurance.<br />
[1997] 2 ILRM 499; Sweeney v Duggan [1997] 2 ILRM 211.<br />
Medical Defence Union v Department fo Trade [1980] 3 IR 621; Barry v Medical Defence Union [2005] IESC<br />
41.<br />
[2007] EWCA Civ 262.<br />
162
8<br />
CHAPTER 8<br />
THE DUTY OF UTMOST GOOD FAITH - POST CONTRACTUAL ASPECTS<br />
A Introduction 1<br />
Section 17 of the Marine <strong>Insurance</strong> Act 1906 states: ―A contract of Marine <strong>Insurance</strong> is a contract based<br />
upon the utmost good faith, and, if the utmost good faith is not observed by either party, the contract may<br />
be avoided by the other.‖<br />
8.01 This proposition is regarded widely as expressing a principle that is applicable to marine and<br />
non marine insurance contracts. Within the context of pre-contractual non-disclosure dispute in regard to<br />
property insurance, the Supreme Court has affirmed that the:<br />
―contract of insurance requires the highest standard of accuracy, good faith, candour and<br />
disclosure by the insured when making a proposal for insurance…[a]ny misstatement in the<br />
answers given, when they relate to a material matter affecting the insurance, entitles the<br />
insurance company to avoid the policy and repudiate liability if the event insured against<br />
happens.‖ 2<br />
8.02 The Supreme Court has also mentioned with approval 3 Lord Mansfield‘s Carter v Boehm<br />
explanation of the duty of good faith as extending into the area of non disclosure as well as<br />
misrepresentation. Lord Mansfield explained that the<br />
―Reason for the Rule which obliges parties to disclose, is to prevent fraud and to encourage<br />
good faith. It is adopted to such facts as vary the nature of the contract; which one privately<br />
knows, and the other is ignorant of and has no reason to suspect.‖ 4<br />
8.03 In this Consultation Paper the <strong>Commission</strong> has decided not to examine the law of marine<br />
insurance, nor related areas of insurance relating to aviation and transport insurance which are commonly<br />
placed on a marine insurance basis. This Consultation Paper does not examine the difficult question of<br />
what differences exist vis-à-vis the section 17 duty of utmost good faith and the duty of good faith at<br />
common law. The <strong>Commission</strong> notes that the Englsh and Scottish <strong>Law</strong> <strong>Commission</strong>s have considered<br />
this question 5 and do not consider that there is any significant difference in terms of the substantive<br />
content of either duty. The <strong>Law</strong> <strong>Commission</strong>s‘ view is in accordance with that expressed by McCarthy J<br />
1<br />
2<br />
3<br />
4<br />
5<br />
Ahern, ―The Formation of <strong>Insurance</strong> <strong>Contracts</strong> and the Duty of Insurers‖ [2009] CLP 84; Bennett, ―Mapping the<br />
Doctrine of Utmost Good Faith‖ [1999] LMCLQ 165; Davey, ―Unpicking the Fraudulent Claims Jurisdiction in<br />
<strong>Insurance</strong> <strong>Law</strong>‖ [2006] LMCLQ 42; Merkin and George, ―The Continuing Duty of Utmost Good Faith‖ (1998) 10<br />
SA Mercantile LJ 135; Merkin and Lowry, ―Good Faith and Breach of Warranty‖ [2004] LMCLQ 158;<br />
Longmore, ―An <strong>Insurance</strong> <strong>Contracts</strong> Act for the New Century?‖ [2001] LMCLQ 356; Lowry and Rawlings,<br />
―Insurers, Claims and the Boundaries of Good Faith‖ (2005) 68 MLR 82; Campbell, ―The Nature of an Insurer‘s<br />
obligation‖ [2000] LMCLQ 42; Rose, ―Information Asymmetry and the Myth of Good Faith‖ [2007] LMCLQ 181;<br />
Ryan, ―Moral Hazard and the duty of disclosure‖ [2007] CLP78; Soyer, ―Continuing Duty of Utmost Good Faith<br />
in <strong>Insurance</strong> <strong>Contracts</strong>‖ [2003] LMCLQ45; Tarr, ―Fraudulent <strong>Insurance</strong> Claims‖ [2008] JBL 139; Thomas,<br />
―Fraudulent <strong>Insurance</strong> Claims‖ [2006] LMCLQ 485.<br />
Kenny J in Chariot Inns Ltd v Assicurazione Generali Spa [1981] IR 199 at 225.<br />
Aro Road and Land Vehicles Ltd v <strong>Insurance</strong> Corporation of Ireland [1986] IR 403. See Lord Hobhouse in<br />
The Star Sea [2001] UKHL 1, [2003] 1 AC 469, at para 49.<br />
(1766) 3 Burr 1905 at 1911.<br />
<strong>Reform</strong>ing <strong>Insurance</strong> Contract <strong>Law</strong>: Issues Paper 7: The Insured‟s Post-Contract Duty of Good Faith p.1<br />
(2010).<br />
163
in the Aro Road case who wrote that ―good faith is not raised in its standard by being described as the<br />
utmost good faith; good faith requires candour and disclosure, not, I think, accuracy in itself.‖ 6 The <strong>Law</strong><br />
<strong>Commission</strong>s have suggested that any statutory formation should drop the reference to ―utmost‖, a<br />
position already taken in the PEICL Article 1:104 with particular regard to be ―had to the need to promote<br />
good faith and fair dealing in the insurance sector, certainty in contractual relationships, uniformity of<br />
application and the adequate protection of policyholders.‖<br />
8.04 It is arguable that the references in Article 1:104 of the PEICL provide additional guidance on<br />
how contract rules should be interpreted and applied, over and above the need for good faith.<br />
B<br />
Rationale for the duty of utmost good faith<br />
8.05 The <strong>Law</strong> <strong>Commission</strong>s observe that it is right that the law should provide safeguards against<br />
the moral hazards of insurance particularly the possibility that policyholders may lie, or insurers may delay<br />
in processing a claim. <strong>Insurance</strong> is:<br />
―a bargain in which one party pays money to another not in return for goods or services but for<br />
a promise to pay should a particular event occur. The insurer has to be confident that the<br />
policyholder has provided a fair presentation of the risk, and has acted honestly in making a<br />
claim. Policyholders have to be confident that their claims will be considered in a fair an<br />
unbiased way. Mutual duties of good faith reinforce the parties‘ contractual arrangements.‖ 7<br />
8.06 While the duty of good faith is most readily identified with a proposer‘s duty to make full<br />
disclosure, the duty is a mutual duty that can be invoked by the proposer. Lord Mansfield said as much in<br />
Carter v Boehm, and Eggers, Picken and Foss give a number of instances where a misrepresentation<br />
made by an insurer could give rise to liability. 8 However, in relation to non disclosure by an insurer to an<br />
insured, the leading English case 9 holds that liability in contract, tort and the Misrepresentation Act 1967<br />
cannot be established vis-a-vis damages: the sole remedy that is available following on from breach of<br />
the mutual duty of good faith is limited to avoidance. Damages are not available for breach of the mutual<br />
duty, which, in a post contractual setting is wholly one sided as a remedy, of value to the insurer only, and<br />
affording the insurer a disproportionate benefit by allowing the insurer to retrospectively avoid the liability<br />
to indemnify the insured.<br />
8.07 It should be highlighted at the outset that there are no Irish cases that support a general duty of<br />
post contractual good faith. It is also evident that there is scant authority in other countries, other than<br />
where statute mandates such a proposition. 10 Eggers, Picken and Foss 11 challenge recent assertions that<br />
there is no such post contractual duty, relying essentially upon one case to support the existence of such<br />
a duty. 12 Hirst J formed the view that there was a post-contractual duty of good faith on the basis of dicta<br />
in cases concerning held covered clauses 13 orders for ship‘s papers 14 and fraudulent claims. 15 On this<br />
6<br />
7<br />
8<br />
9<br />
10<br />
11<br />
12<br />
13<br />
[1986] IR 403 at 413.<br />
Issues Paper 7 p.1.<br />
Eggers, Picken & Foss, Good Faith and <strong>Insurance</strong> <strong>Contracts</strong>, 3 rd ed (ISBS 2010) at 201-2; see Duffell v<br />
Wilson (1808) 1 Camp. 401 for an early example.<br />
Banque Financiere de la Cite v Westgate <strong>Insurance</strong> Co [1990] 2 All ER 947.<br />
Eg Australia, <strong>Insurance</strong> <strong>Contracts</strong> Act 1984, sections 13 and 14.<br />
Eggers, Picken & Foss, Good Faith and <strong>Insurance</strong> <strong>Contracts</strong>, 3 rd ed (ISBS 2010) at 243. See Morison J in<br />
Bonner v Cox [2004] EWHC 2963 (Comm), following The Star Sea: ―post contract the source of the<br />
obligations must be found in the contract; there is no concept of a free standing duty of good faith after the<br />
contract has been concluded… no general duty of ―fair dealing‖ or disclosure.‖<br />
The Litsion Pride [1985] 1 Lloyd‘s Rep 437 at 509-512.<br />
Overseas Commodities Ltd v Style [1958] 1 Lloyd‘s Rep 546: Liberian Ins Agency v Mosse [1977] 2 Lloyd‘s<br />
Rep 560.<br />
164
and other points, The Litsion Pride was overruled in The Star Sea. 16 In Canada it has been held that the<br />
concept of utmost good faith ―plays no part when it comes to an allegation of fraud in the proof of loss‖:<br />
Tumbles Video Ltd v INA <strong>Insurance</strong> Co of Canada. 17 It is certainly arguable that enthusiasts for a general<br />
post contractual duty require section 17 of the Marine <strong>Insurance</strong> Act 1906 to carry more weight than it can<br />
realistically sustain.<br />
8.08 Critics of a post contractual duty of good faith point to not only the inherent vagueness of the<br />
duty and the fact that the remedy of avoidance found in section 17 is inappropriate. Lord Hobhouse, in<br />
The Star Sea said that, apart from some reinsurance situations ―it is hard to think of circumstances where<br />
an assured will stand to benefit from the avoidance of the policy for something that has occurred after the<br />
contract has been entered into.‖ 18<br />
8.09 There are good policy reasons why the duty of pre-contractual good faith on both sides – ie the<br />
duty to make disclosure and not to misrepresent matters of fact – should be supported. It is generally<br />
cheaper and easier for proposers to disclose what they already know, or may be able to readily discover<br />
(be the most effective source of information in other words) than for an insurer to have to investigate<br />
circumstances and phycical and other conditions, perhaps at some remote place. Nevertheless, there<br />
are equally valid reasons why it may be appropriate for the insurer to separately evaluate ―the risk‖, (eg<br />
examine a site or locality for the purposes of property insurance), failure to do so constituting a waiver of<br />
the duty of disclosure. The insurer will be in the best position to assess risk when the proposer has no<br />
special knowledge or no appreciation of the risk. The <strong>Commission</strong> believe that the provisional<br />
recommendations made on recasting the duty of disclosure to a redacted duty that genuinely depends on<br />
disparity of information will more appropriately reflect the spirit of Lord Mansfield‘s views in Carter v<br />
Boehm. Rose provides three interesting explanations for the exceptional nature of the utmost good faith<br />
obligation in insurance law, isolated as it generally is in the common law:<br />
―The first is formal. Simply, the pre-contractual duty of disclosure is established by judicial and<br />
statutory authority so cannot be overcome without legislative intervention, until which time it<br />
remains as a base for potential expansion. A second possibility is psychological. The duty of<br />
disclosure is commonly articulated superlatively within a more grandly expressed idea – utmost<br />
good faith – and it is also expressed in terms of an ancient and dignified language (uberrima<br />
fides or uberrimae fidei) – as indeed is the best known emanation of the contrary general<br />
principle (caveat emptor). This both enhances its apparent authority and seems to have<br />
encouraged an indiscriminate and symbiotic association between different expressions of good<br />
faith and duties to disclose. Thirdly, there has been habitual conditioning…judiciary seems to<br />
have accepted that constant reference to post-contractual duties of good faith and disclosure –<br />
often unaccompanied, indeed perhaps because unaccompanied, by specific illustrations of<br />
their practical application – has given them some form of validity which may now need to be<br />
removed rather than simply denied. The law has been allowed to appear more complicated<br />
than it really is, and to be given support for becoming so.‖ 19<br />
8.10 The concept of uberrimae fides or uberrimae fidei itself has not been universally acclaimed as<br />
an essential part of insurance law. In South Africa the Court of Appeal, in Mutual and Federal <strong>Insurance</strong><br />
Co Ltd v Oudtshoorn 20 saw no real role for utmost good faith in Roman Dutch <strong>Law</strong>.<br />
14<br />
15<br />
16<br />
17<br />
18<br />
19<br />
20<br />
Leon v Casey [1932] 2 KB 576 and China Traders Ins Co Ltd v Royal Enchange Assurance Corp [1898] 2 QB<br />
187; Boulton v Holder Bros & Co [1904] 1 KB 784; Harding v Bussell [1905] 2 KB 83.<br />
Britton v Royal Ins Co (1866) 4 F&F 905, 909.<br />
[2001] UKHL 1, [2003] 1 AC 469.<br />
[1992] 2 WWR 66: Saskachewan Crop <strong>Insurance</strong> Crop v Deck [2008] 8 WWR 501.<br />
[2001] UKHL 1, [2003] 1 AC 469, at para. 57.<br />
[2007] LMCLQ 181, at 195.<br />
1985 1 SA 419; Joubert JA said that utmost good faith was unknown to Roman law. For a discussion on<br />
PEICL and the duty of disclosure in Dutch law see Delfos-Roy (2011) 19 ERPL 71.<br />
165
8.11 The most visible demonstration of utmost good faith is the duty on insureds not to submit<br />
fraudulent claims. The way in which this aspect of the post contractual duty of utmost good faith has<br />
been supported by some judges – whether it is seen as related to s.17 of the 1906 Act, or is an implied<br />
term in an insurance contract itself – has no real impact on the rationale that stands behind the<br />
requirement that an insured must not submit a fraudulent claim.<br />
―The logic is simple. The fraudulent insured must not be allowed to think: if the fraud is<br />
successful, then I will gain: if it is unsuccessful, I will lose nothing.‖ 21<br />
8.12 In Aviva <strong>Insurance</strong> Ltd v Brown 22 the insured made a claim for subsidence damage to his<br />
home. The claim was a valid one but in putting forward his claim in respect of alternative accommodation<br />
he indicated that a named property was available to rent and it was owned by someone other than<br />
himself. The insured owned the property and it was not in fact on the rental market. Holding that the<br />
misrepresentation was not ―insubstantial‖, ―insignificant‖ or ―immaterial‖, Eder J held that £176,951.78,<br />
paid for repairs due was to be repaid as the claim was tainted by fraud,<br />
―this conclusion might seem harsh but it seems to me that it is the inevitable results of the<br />
conclusions I have reached on the facts and the well-established policy of the law, set out, in<br />
the authorities I have already cited.‖ 23<br />
8.13 There are some post contractual situations that have been regarded as involving good faith<br />
issues. Longmore LJ, in the Mercandian Continent 24 suggested that post contractual duties of good faith<br />
may arise when the insured or the insurer seeks to vary the contractual risk. As these situations are<br />
regarded as analogous to negotiating a new contract, a misrepresentation will avoid the term as to<br />
variation. 25 The same position holds in respect of misrepresentations made at renewal of a contract. 26 In<br />
both these instances the earlier contract is not rendered void ab initio and thus add little or no support to<br />
the existence of a general good faith doctrine. The <strong>Commission</strong> consider that these duty of disclosure<br />
cases do not strengthen any argument that a post contractual duty of good faith exists, at common law,<br />
by analogy with section 17 of the Marine <strong>Insurance</strong> Act 1906; the <strong>Commission</strong> believe that those cases<br />
reflect the essentially ad hoc nature of the duty.<br />
8.14 Nevertheless, there are instances where the contract of insurance may contain express or<br />
implied terms requiring the insured to provide information to the insurer. These situations were examined<br />
by the <strong>Law</strong> <strong>Commission</strong>s in Issues Paper No.7, largely in the context of Articles 4:201 and 4:202 of the<br />
PEICL which impose obligations on the parties to notify each other of changes in circumstances which<br />
either aggravate the risk or effect a material reduction of the risk. 27 This mechanism was also found in the<br />
ill fated proposed <strong>Insurance</strong> Directive from the late 1970s and it is an essential part of the European<br />
<strong>Insurance</strong> scene because insurance contracts tend to run for long periods (as distinct from the UK and<br />
Irish models which are short term or revolve around annual renewals).<br />
8.15 The <strong>Commission</strong> see no need for specific provisions about change in circumstances. Insurers<br />
themselves are well able to identify and seek to insist on circumstances being communicated as a matter<br />
of contractual obligation, and insurers use conditions, exemptions and temporal restrictions to protect<br />
their interests. Adding a generalised duty of this kind would cause uncertainty and would in the<br />
<strong>Commission</strong>‘s view be unnecessary. The <strong>Commission</strong> agree with the <strong>Law</strong> <strong>Commission</strong>s that notification<br />
21<br />
22<br />
23<br />
24<br />
25<br />
26<br />
27<br />
Lord Hobhouse in The Star Sea [2001] UKHL 1, [2003] 1 AC 469 at para. 62.<br />
[2011] EWHC 362 (QB).<br />
Ibid, para 122, citing The Star Sea [2001] UKHL 1, [2003] 1 AC 469; Britton v Royal <strong>Insurance</strong> Co (1866) 4 F<br />
& F 905; Galloway v Guardian Royal Enchange (UK) [1999] 2 Lloyd‘s Rep IR 209.<br />
[2001] EWCA Civ 1275.<br />
Eggers, Picken and Foss, Good Faith and <strong>Insurance</strong> <strong>Contracts</strong>, 3 rd ed (ISBS 2010) at para. 16.50 – 16.54.<br />
Eggers, Picken and Foss, Good Faith and <strong>Insurance</strong> <strong>Contracts</strong>, 3 rd ed (ISBS 2010) at para. 10.38 – 10.40.<br />
Issues Paper 7, para. 6.29 – 6.47. See also Smith, The Effect of subsequent increases of risk on <strong>Contracts</strong> of<br />
<strong>Insurance</strong> [2009] LMCLQ 366.<br />
166
clauses have no obvious ―good faith‖ characteristics inherent in them and that satisfactory control of these<br />
clauses can be left to the judiciary who can and do interpret them restrictively.<br />
C<br />
Post contractual duty of good faith – the duty not to make a fraudulent claim<br />
8.16 English case-law in recent times has been generally emphatic in holding that an insured is<br />
under a duty not to make a fraudulent claim. The basis of the duty however is a matter upon which the<br />
judges have differed. For our purposes the statutory basis, section 17 of the Marine <strong>Insurance</strong> Act 1906<br />
can be left to one side: although the Litsion Pride 28 provides support for affording an ―utmost good faith‖<br />
basis for this duty, Manifest Shipping Co. Ltd v Uni-Polaris Shipping Co. Ltd (The Star Sea) effectively<br />
overruled The Litsion Pride. In that case Hirst J had ruled that the duty extended to the giving of<br />
information on the voyage being undertaken. The House of Lords criticised the view that, absent a<br />
breach of contract, avoidance of the policy could be available outside the framework of the 1906 Act.<br />
Lord Hobhouse indicated that forfeiture, as a common law remedy that prevented a fraudulent claim form<br />
being met, was both the correct and most desirable remedy. Alternative views on the correct judicial<br />
basis of the duty not to make fraudulent claims that were canvassed prior to The Star Sea have focused<br />
on an implied contractual term, but these judgments 29 are now incompatible with The Star Sea. Eggers 30<br />
et al are prepared to argue that, conceptually, the duty not to make a fraudulent claim can be<br />
accommodated under the duty of utmost good faith and that both the weight of authority, 31 and the<br />
information imbalance that is at the core of the duty, favour this approach. While the House of Lords in<br />
The Star Sea were concerned to limit both the scope of post contractual duties of good faith and the<br />
avoidance of the contract remedy, Eggers argues that the law requires a rule which will deter insurance<br />
fraud while at the same time averting the prospect that avoidance, as an inflexible remedy, can be a<br />
possible source of injustice. The <strong>Commission</strong> agrees with this perspective and would support the view<br />
that Irish law should attempt to provide a flexible response to the fraudulent claims problem, whilst<br />
eschewing difficult questions of definition eg ―forfeiture‖ of claims as distinct from contractual rescission,<br />
―avoidance‖, whether retrospective or prospective. The <strong>Commission</strong> will examine this issue in Chapter 10,<br />
Remedies.<br />
8.17 The <strong>Law</strong> <strong>Commission</strong>s have examined post The Star Sea case-law and have apparently not<br />
endorsed the analysis of Longmore LJ in The Mercandian Continent 32 in which an attempt was made to<br />
align pre and post contractual good faith by requiring the non disclosure or misrepresentation to be<br />
material and to have induced the contract. The <strong>Law</strong> <strong>Commission</strong> notes that MacGillivray comments that<br />
this is not an onerous standard for the insurer to meet – ―in most cases, the fraud is material and would<br />
be sufficient to allow the insurer to repudiate‖ under section 17. 33 A bolder attempt to clarify the law was<br />
made by Mance LJ in Axa General <strong>Insurance</strong> Ltd v Gottlieb: 34<br />
―there is no basis or reason for giving the common law rule relating to fraudulent claims a<br />
retrospective effect on prior separate claims which have already been settled under the same<br />
policy before any fraud occurs. It is unnecessary to reach any conclusion on this case on the<br />
28<br />
29<br />
30<br />
31<br />
32<br />
33<br />
34<br />
[1985] 1 Lloyd‘s Rep 437.<br />
Eg Orakpo v Barclays <strong>Insurance</strong> Services [1995] LRLR 443 per Hoffmann LJ, outlining a theory of repudiatory<br />
breach by way of the making of a fraudulent claim, fraud going to the root of the contract (p.451).<br />
Eggers, ―Utmost Good Faith and the Handling of Claims‖ in Soyer, <strong>Reform</strong>ing Marine and Commercial<br />
<strong>Insurance</strong> <strong>Law</strong>, at 243.<br />
Britton v Royal <strong>Insurance</strong> Co (1866) 4 F & F 905; Lek v Mathews (1927) 29 LI.L. Rep. 141; Galloway v<br />
Guardian Royal Exchange (UK) Ltd [1999] Lloyd‘s Rep IR 209.<br />
[2001] EWCA Civ 1275.<br />
Issues Paper 7, para. 2.19. See also Eggers, ―Utmost Good Faith and the Handling of Claims‖ in Soyer,<br />
<strong>Reform</strong>ing Marine and Commercial <strong>Insurance</strong> <strong>Law</strong> at.247.<br />
[2005] EWCA Civ 112.<br />
167
common law position relating to separate claims which are still unpaid at the time of the<br />
fraud…‖ 35<br />
8.18 In Agapitos v Agnew (No 1) 36 a warranty in a policy against port risks required a certificate from<br />
the London Salvage Association prior to ―hot work‖ being carried out. After commencement of the<br />
litigation of a claim for a loss caused by fire the assured disclosed statements of hot works occurring<br />
before the fire. The insurers applied to amend its defence to plead that the insured had a postcontractual<br />
duty of good faith and was in breach of it, so as to entitle them to avoid the policy. However,<br />
the Court of Appeal held that the rule whereby fraud in attempting to enforce a claim operated to defeat<br />
the claim was not part of a post-contractual duty of good faith derived from the Marine <strong>Insurance</strong> Act<br />
1906, s 17; in any event, as in The Star Sea, once litigation had begun the matter was governed by<br />
procedural rules of litigation.<br />
D<br />
Non payment of a fraudulent claim, not avoidance of the policy<br />
8.19 It is now clear that the principle denying recovery on a claim made by a person who has<br />
fraudulently exaggerated the loss, the claim itself being otherwise valid, is a special rule of insurance<br />
law. 37 Efforts to extend this rule into personal injury claims 38 outside the insurance contract have been<br />
rejected, whether the dishonesty seeks to benefit that individual 39 or a third party. 40 The fact that this rule<br />
is specific to insurance and that it pre-dates the 1906 Act – Britton v Royal <strong>Insurance</strong> Co, is a fire<br />
insurance case after all – suggests that there is much to be said for Mance LJ‘s view that the common<br />
law principle governing fraudulent claims has a separate origin and existence to any principle that exists<br />
under, or by analogy with, section 17 of the Marine <strong>Insurance</strong> Act 1906. 41 After noting that counsel for the<br />
insurer was pressing for an interpretation of the forfeiture principle in relation to fraudulent claims that<br />
would have had a similar effect to avoidance ab initio, Mance LJ decided that the effect of the forfeiture<br />
rule does not to enable the insurer to recoup payments made earlier during the life of the policy when<br />
those claims were valid and untainted by fraud.<br />
8.20 To summarise, English case-law seems to be setting down around the proposition that the<br />
forfeiture of fraudulent claims provisions can be based upon the express terms in the contract, but that<br />
even if there are no such express terms, a fraudulent claim will be forfeit as a matter of common law. The<br />
forfeiture operates on the claim and is not a facet of any common law duty of utmost good faith or section<br />
17 of the Marine <strong>Insurance</strong> Act 1906.<br />
8.21 However, it would be desirable to legislate to carify what the appropriate penalty should be in<br />
the context of a fraudulent claim. Unlike pre contractual fraud, whereby the common law declared the<br />
contract to avoid ab initio, there is no doubt that post contractual fraud disentitles the claimant from<br />
recovering on it but that a valid contract subsists. The <strong>Law</strong> <strong>Commission</strong>s 42 cite the Scottish case of<br />
Fargnoli v GA Bonus Plc 43 as clarifying this point. It would be helpful if a declaratory statement were<br />
made in forthcoming legislation making it clear that the forfeiture of claims fraudulently made rested upon<br />
public policy considerations rather than any common law or statutory (ie section 17 of the 1906 Act) duty<br />
35<br />
36<br />
37<br />
38<br />
39<br />
40<br />
41<br />
42<br />
43<br />
[2005] EWCA Civ 112 at para. 22<br />
[2002] EWCA Civ 247.<br />
The Star Sea [2001] UKHL 1, [2003] AC 469; Agopitos v Agnew [2002] EWCA Civ 247; Axa General<br />
<strong>Insurance</strong> v Gotlieb [2005] EWCA Civ 112.<br />
Molloy v Shell UK [2001] EWCA Civ 1271 per <strong>Law</strong>s LJ.<br />
Churchill Car <strong>Insurance</strong> v Kelly [2006] EWHC 18 (QB).<br />
Shah v Ul-Hag [2009] EWCA Civ 542.<br />
Axa General <strong>Insurance</strong> Ltd v Gottlieb [2005] EWCA Civ 112.<br />
Issues Paper 7, para 2.26.<br />
[1997] CLC 653.<br />
168
of good faith. This declaratory provision should also make it clear that the policy is not avoided by reason<br />
of the making of the fraudulent claim but that any claim made on the basis of the fraud is forfeited.<br />
8.22 Support for this position is found in the PEICL, in the Australian Act and in Issues Papers 6 and<br />
7 produced by the <strong>Law</strong> <strong>Commission</strong>s in 2010. Article 6:102 PEICL operates in the context of a duty<br />
placed upon an insured to respond to an insurer‘s reasonable requests for information and the supply of<br />
documentary evidence and information generally. Implicit in this is an honesty and accuracy requirement.<br />
As an article that is labelled as a claims cooperation provision, the article distinguishes cases of breach<br />
simpliciter from breach with intent to cause prejudice or breaches made recklessly and with knowledge<br />
that predjudice would result. For breach simpliciter a proportionality remedy vis-a-vis the insurance<br />
money is the remedy. In the breach with intent context, ―the insurer shall not be obliged to pay the<br />
insurance money.‖<br />
8.23 The Australian <strong>Insurance</strong> <strong>Contracts</strong> Act 1984, relating to fraudulent claims provides at section<br />
56(1):<br />
―Where a claim under a contract of insurance, or a claim under this Act against an insurer by a<br />
person who is not the insured under a contract of insurance is made fraudulently, the insurer<br />
may not avoid the contract but may refuse payment of the claim.‖<br />
8.24 This part of section 56 has not proved controversial. The rest of the section however has been<br />
the subject of much adverse comment, as will be shown.<br />
8.25 In the specific context of section 17 and the Marine <strong>Insurance</strong> Act 1906 (it should be recalled<br />
that most of the influential recent cases on the forfeiture for fraudulent claims have not been marine<br />
insurance): the <strong>Law</strong> <strong>Commission</strong>s reached the ―tentative conclusion‖ that the section 56(1) Australian<br />
approach should be followed, a solution that the <strong>Law</strong> <strong>Commission</strong>s said was ―well established and<br />
accepted.‖ 44 The <strong>Commission</strong> will return to this question in Chapter 10, Remedies.<br />
E<br />
Other (contractual) remedies<br />
8.26 One question that arises is the scope of the duty of good faith and whether, by contract,<br />
remedies other than forfeiture will be available. Lord Hobhouse, in The Star Sea was extremely hostile to<br />
both an expansive view on the nature of the duty of good faith and the development of any post<br />
contractual duty of good faith. Any support for the idea that good faith was a continuing duty, post<br />
contract formation, was scant. Even accepting that the duty could be broken when an insured submitted<br />
a fraudulent claim, the weight of authority indicated that submission of such a claim did not give the<br />
insurer the right to treat the contract as void ab initio, but rather, the claim was forfeit by virtue of the<br />
fraud. Lord Hobhouse closed his analysis of the authorities by remarking that they ―show that suitable<br />
caution should be exercised in making any extensions to the law of non disclosure and that the courts<br />
should be on their guard against the use of the principle of good faith to achieve results which are only<br />
questionably capable of being reconciled with the mutual obligation to observe good faith.‖ Eggers et al<br />
speculate that should the parties to an insurance contract expressly provide for an insured to be under a<br />
duty not to submit a fraudulent claim, or a court be prepared to imply a term into a contract having such<br />
an effect, the applicable remedy would not be self evident, as the law stands. Clearly if the obligation is<br />
an express term the contract will be dispositive, but resort to implied terms as a source of the obligation<br />
will hardly provide a coherent basis for the remedy. Eggers cautions against expanding the law in an<br />
unbalanced and uncertain manner. 45<br />
44<br />
45<br />
Issues Paper 7, para. 4.81.<br />
Eggers, ‗Utmost Good Faith and the Presentation and Handling of Claims‘ in Soyer, <strong>Reform</strong>ing Marine and<br />
Commercial <strong>Insurance</strong> <strong>Law</strong>, p.229 at 235-6.<br />
169
F<br />
Effects of fraud<br />
8.27 Once the fraudulent claim is discovered, the courts hold that the entire claim is forfeit. In<br />
Galloway v Guardian Royal Exchange (UK) Ltd 46 the victim of a burglary submitted a claim for £18,000,<br />
including in the claim an item which did not exist which was estimated at £2,000. The entire claim was<br />
rejected. There is a de minimis rule which is uncertain in its application. Some judges take the view that<br />
if the fraud is an unsubstantial element in a large claim it will not necessarily taint the claim eg a loss of<br />
0.3% of the claim in Tonkin v UK <strong>Insurance</strong>. 47 Eggers is critical of the Tonkin approach 48 but the <strong>Law</strong><br />
<strong>Commission</strong>s appear to side with the Tonkin decision:<br />
―The courts are clearly right to reject the idea that policyholders are allowed some margin of<br />
fraud, so as to increase claims by 10%, 5% or even 1%. On the other hand, the issue of<br />
whether the fraudulent element of the claim is more than minimal must be looked at in the<br />
context of the claim itself. We think it would be wrong to state that the courts should never<br />
consider the amount of the fraud as a proportion of the claim. A misrepresentation which<br />
appears substantial in the context of a £20,000 claim may be viewed differently in the context<br />
of a £2 million claim. 49<br />
8.28 However, it is only the claim that is made fraudulently that is forfeit, as English 50 and Scottish 51<br />
cases in recent years have made clear.<br />
8.29 Generally, while the definition of fraud follows the tried and tested patterns laid down in cases<br />
such as Derry v Peek 52 there are some refinements. Because of the wording of some general clauses<br />
against ―fraudulent devices‖ and ―fraudulent instruments‖ the judicial analysis takes account of these<br />
express terms. MacGillivray explains:<br />
―If the assured makes a claim where he has suffered no loss or claims for a loss which he has<br />
himself caused, insurers do not need to rely on any condition relating to fraudulent claims; but<br />
in practice, where the circumstances are suspicious, it may be much easier to show that the<br />
assured has made a fraudulent statement in the advancement of his claim than it is to show<br />
that he wilfully destroyed his own property. The clause thus enables the assurers to assume a<br />
lesser burden and still defeat the claim. This approach had the full support of, at any rate,<br />
Willes J in his summing-up to the jury in Britton v Royal <strong>Insurance</strong> Co:<br />
―Of course, if the assured set fire to his house, he could not recover. That is clear. But it is not<br />
less clear that, even supposing it were not wilful, yet as it is a contract of indemnity only, that is,<br />
a contract to recoup the insured the value of the property insured by fire, if the claim is<br />
fraudulent, it is defeated altogether. That is, suppose the insured made a claim for twice the<br />
amount insured and lost, thus seeking to put the office off its guard, and in the result to recover<br />
more than he is entitled to, that would be a wilful fraud, and the consequence is that he could<br />
not recover anything. This is a defence quite different form that of wilful arson. It gives the goby<br />
to the origin of the fire, and it amounts to this – that the assured took advantage of the fire to<br />
make a fraudulent claim.‖ 53<br />
46<br />
47<br />
48<br />
49<br />
50<br />
51<br />
52<br />
53<br />
[1999] Lloyd‘s Rep IR 209; Micro Design Group Ltd v Norwich Union <strong>Insurance</strong> Ltd [2005] EWHC 3093 (TCC);<br />
Aviva <strong>Insurance</strong> Co v Brown [2011] EWHC 362 (QB) shows that where the fraud is discovered before all<br />
payments have been made, it will not matter what percentage of the claim is tainted as long as it is not de<br />
minimis.<br />
[2006] EWHC 1120 (TCC).<br />
In Soyer, <strong>Reform</strong>ing Marine and Commercial <strong>Insurance</strong> <strong>Law</strong>, p.239.<br />
Issues Paper 7, para. 326, citing Tonkin at para 3.27.<br />
Agapitos v Agnew [2002] EWCA Civ 247; Axa General <strong>Insurance</strong> Ltd v Gottlieb [2005] EWCA Civ 112.<br />
Fargnoli v GA Bonus Plc [1997] CLC 653.<br />
(1889) 14 AC 337 at 374 per Lord Herschell.<br />
Para 19-057, citing Britton, reported at (1866) 4 F & F 905 at 909.<br />
170
8.30 Some exaggeration of a claim is permissible when it is clear that the insured is about to<br />
commence to bargain with the insurer and the inflated nature of the claim is clear to the insurer. Some<br />
cases suggest that a deliberately inflated claim may however be proof of fraudulent intent and loss,<br />
especially when supported by a fraudulent device. 54 In the most recent English case, Aviva <strong>Insurance</strong> v<br />
Brown, 55 a letter written to support a claim for rental costs for a vacant house that the insured actually<br />
owned was a fraudulent device.<br />
8.31 The leading Irish case is Fagan v General Accident Fire and Life Assurance Corp Plc. 56 A<br />
domestic fire insurance policy was effected by the plaintiff. A fire occurred shortly thereafter. A claim was<br />
―supported‖ by a list of over 20 pages of false or grossly exaggerated claims. Applying Lek v Matthews,<br />
Murphy J said that the facts and figures submitted were ―deliberately overstated‖. Had the case not been<br />
one of deliberate and insupportable claims, putting an ―extremely optimistic‖ valuation would not justify<br />
the insurer in repudiating the policy, but these facts did not fall into such a category. The Fagan case was<br />
mentioned by the <strong>Insurance</strong> Ombudsman of Ireland in a later adjudication. 57 Fagan was distinguished on<br />
the basis that while the motor vehicle insured and later stolen and burnt out had been over-valued in the<br />
proposal form a claim for the true value was only made. Surprising perhaps, a separate item, a radio that<br />
appears to have been claimed for fraudulently, did not taint the entire claim in Fagan.<br />
8.32 The <strong>Commission</strong> does not seek to provide a definition of fraud in this, or indeed, any other<br />
context. However, because the policy that stands behind the forfeiture claims can lead to harsh but<br />
morally and economically defensible results, efforts have been made to soften the impact of the law. In<br />
particular Lord Justice Mance in Agapitos v Agnew 58 observed that while the fraudsters own appreciation<br />
of the value of the lie will suffice, there should be some objective element: Mance LJ proposed that the<br />
insurer or judge should objectively determine that the fraudulent device or means should yield a not<br />
insignificant improvement in the insured‘s prospects of gaining a settlement, or an enhanced settlement,<br />
or succeeding at any trial. 59<br />
8.33 Later English cases have developed these tests so as to deny forfeiture in respect of de<br />
minimis or irrelevant lies.<br />
G<br />
Co-insurance and moral hazard<br />
8.34 The law of agency 60 views certain kinds of insurance contract, whereby two or more persons<br />
seek to effect insurance in respect of joint property, as indivisible moral hazard situations. In accordance<br />
with the need to deter the insured from causing the loss, certain kinds of joint insurance treat all the<br />
policyholders as subject to the rule that an improper claim affects all the policyholders, regardless of<br />
knowledge or fault.<br />
8.35 The law draws a distinction between composite insurance and joint insurance. In a composite<br />
insurance policy each policyholder has a right to enforce the policy in his or her own name and any claim<br />
made will generally not be affected by any fraud perpetrated by another policyholder. In a case of joint<br />
insurance all policyholders are linked together and a wrongful or fraudulent act by any one of them, post<br />
contract, will allow the insurer to avoid the policy against all policyholders. Whether a policy is composite<br />
or joint insurance is a matter of construction.<br />
54<br />
55<br />
56<br />
57<br />
58<br />
59<br />
60<br />
See the cases collected by MacGillivray at paras 19-058 and 19-059.<br />
[2011] EWHC 362 (QB). Evidence given in the witness box by a claimant will also taint the claim: Yeganah v<br />
Zurich plc [2011] Lloyd‘s Rep. IR 75.<br />
HC Unreported February 19, 1993. For townland-wide insurance fraud, see Kavanagh, The Green Fool<br />
(Penguin Books, 1971) pages 125-6.<br />
Digest of Cases 1992-1998 Case Study 80.<br />
[2002] WECA Civ 247 at para 38.<br />
Ibid. See the application of this approach in the fraudulent invoices cases in business interruption insurance,<br />
Sharon‟s Bakery (Europe) Ltd v Axa <strong>Insurance</strong> UK Plc [2011] EWHC 210 (Comm) being the latest example.<br />
Bowstead on Agency p.145-6 (2010) contains a discussion on agency and married persons that is of interest.<br />
171
8.36 In the case of composite insurance the obligations are several and one co-insured will not be<br />
prejudiced by the fraud of another. In McAleenan v AIG (Europe) Ltd 61 the plaintiff was a solicitor<br />
employed within the law firm Michael Lynn & Co. A pre contractual misrepresentation was made by<br />
Michael Lynn that the plaintiff was a partner in the firm. The plaintiff sought to claim on the professional<br />
indemnity policy obtained via the misrepresentation. One issue for Finlay Geoghegan J to decide was<br />
whether the policy was joint or several. The learned judge approved the following discussion from<br />
Colinvaux‟s <strong>Law</strong> of <strong>Insurance</strong>:<br />
―Joint and composite policies. Where two or more persons are insured under a single policy, it<br />
is important to determine whether the policy is joint or composite, in that the former is regarded<br />
as a single contract whereas the latter is a bundle of contracts. The distinction is based on the<br />
nature of the interests of the assureds, if the assureds share a common interest in the insured<br />
subject matter, eg where they are joint owners of a property or partners, the policy is joint. By<br />
contrast, if the parties have different interests, as in the case of a landlord and tenant or a<br />
mortgagor and mortgagee, the policy is composite.‖ 62<br />
8.37 The effect of fraud on a policy of composite insurance was succinctly stated by Rix J in Arab<br />
Bank Plc v Zurich <strong>Insurance</strong> Co, 63 a case on a professional indemnity policy effected in this case in<br />
favour of the company and directors operating a surveying and valuation business. It is, Rix J said,<br />
―implicit in the nature of a composite policy that one assured is not prejudiced by the dishonesty of<br />
another, provided that the other is not a joint assured.‖ 64 After holding that the policy was to be viewed as<br />
a composite policy, Finlay Geoghegan J ruled that Ms McAleenan could not be prejudiced by Mr Lynn‘s<br />
misrepresentation from relying on the policy. However, a gloss was added to the proposition that fraud by<br />
one co-insured will not preclude another co-insured from relying on the separate rights afforded under the<br />
insurance contract. Finlay Geoghegan J advanced two caveats:<br />
―The first caveat is if the policy of insurance in its express terms provides that the policy and<br />
that the insurer is entitled to repudiate against all co-insureds upon dishonest<br />
misrepresentation in the proposal by any one co-insured. The Policy herein cannot, in my<br />
view, be so construed. The second caveat…is that the relationship between the insured guilty<br />
of the dishonest non-disclosure and the innocent co-insured is such that the knowledge of the<br />
former is attributed to the latter for the purposes of the proposal form. That issue was<br />
expressly addressed by Rix J in Arab Bank Plc and he found at p.283 that the knowledge of<br />
the managing director was not to be attributed either to the company or the innocent directors.<br />
On the facts found herein, Mr Lynn was the employer of the plaintiff and it does not appear to<br />
me that there are either any facts or principles which permit attribution of his knowledge of the<br />
true state of affairs to her, as an employee.‖<br />
8.38 In the case of fraud in respect of a policy of joint insurance the effect of fraud by one insured<br />
will taint the claim, 65 preventing another insured from recovering at all 66 unless some independent basis<br />
for a claim can be put forward. 67 In cases of joint insurance by married couples the effect of the law is<br />
61<br />
62<br />
63<br />
64<br />
65<br />
66<br />
67<br />
[2010] IEHC 128.<br />
Colinvaux, The <strong>Law</strong> of <strong>Insurance</strong>, 8 th ed (Sweet & Maxwell 2006) para 14-03. See also HLB Kidsons (AFirm)<br />
v Lloyd‟s Underwriters [2008] Lloyd‘s Rep IR 237.<br />
[1999] 1 Lloyd‘s Rep 262.<br />
Ibid at p 272, citing Samuel & Co Ltd v Dumas, [1924] AC 431, General Accident Fire and Life Assurance<br />
Corporation Ltc v Midland Bank Ltd, [1940] 2 KB 388, State of the Netherlands v Youell, [1997] 2 Lloyd‘s Rep<br />
440.<br />
Samuel & Co Ltd v Dumas [1924] AC 431; New Hampshire <strong>Insurance</strong> Co v MGN [1997] LRLR 24.<br />
On assignment see The Litsion Pride [1985] 1 Lloyd‘s Rep 437.<br />
General Accident v Midland Bank [1940] 2 KB 388. See also where there is a compromise of a claim – Direct<br />
Line <strong>Insurance</strong> Plc v Fox [2009] EWHC 386 (QB).<br />
172
extremely harsh. In Direct Line <strong>Insurance</strong> Plc v Khan 68 a claim on a policy of domestic fire insurance was<br />
inflated by adding a claim to rental accommodation for a property which Mr Khan owned. Mrs Khan was<br />
not a party to the fraud, nor did she know of her husband‘s misconduct. Mrs Khan‘s innocence did not<br />
provide any basis for relief, nor, given that the duty not to make a fraudulent claim is a rule of law, could<br />
the Unfair Contract Terms Regulations be invoked on her behalf.<br />
8.39 English law is even stricter in relation to the possibility of repentance once the claim has been<br />
submitted. Mance LJ in Agapitos v Agnew 69 and again in the Privy Council in Stemson v AMP General<br />
<strong>Insurance</strong> NZ Ltd 70 seem to have regarded repentence as irrelevant, and certainly in Direct Line<br />
<strong>Insurance</strong> v Fox 71 this was the view taken of the law by Judge Richard Seymour QC.<br />
8.40 This position has been criticised and other jurisdictions have moved some way from operating<br />
a blanket forfeiture mechanism. In cases where the fraudulent act may have some even darker purpose<br />
– one spouse sets fire to the family home seeking to murder the other spouse for example – the idea that<br />
the wholly innocent victim should be prevented from recovering on the policy because of either a<br />
ludicrous application of agency law, or an inappropriate rule of public policy that operates as a windfall to<br />
an insurance company, cannot, in the opinion of the <strong>Commission</strong>, be correct. The <strong>Law</strong> <strong>Commission</strong>s, in<br />
Issues Paper 7 note that case-law from the United States, Canada, Australia and New Zealand has<br />
introduced a ―modern approach‖ to this question. In essence, the automatic forfeiture of all claims<br />
brought on a joint policy where one insured acts fraudulently in promoting the claim is no more. It has<br />
been replaced by the view that an innocent insured should not be punished for the wrongdoing of<br />
another. However, when a claim is brought by the innocent insured the court or indeed the insurer, as a<br />
matter of public policy, should seek to prevent the wrongdoer from benefiting from the policy. The<br />
Supreme Court of Canada in Scott v Wawanesa Mutual <strong>Insurance</strong> Co 72 divided by 4 justices to 3 on the<br />
interpretation of an exception clause barring recovery for deliberate fire damage caused, inter alia by a<br />
minor child of the householder. La Forest J, dissenting, suggested that the court should strive to give<br />
effect to the intention of the parties as of the time of entry into the contract, viewed from the perspective of<br />
an ―ordinary person‖ entering the contract. This approach requires the court to subject the argument that<br />
all obligations in a joint policy are intertwined to an intention of the parties test, for the purpose of the<br />
contractual analysis. This approach replicates that found in the Ontario case of Higgins v Orion<br />
<strong>Insurance</strong> Co, 73 cited by the <strong>Law</strong> <strong>Commission</strong>s. The British Columbia case of Riordan v Lombard<br />
<strong>Insurance</strong> Co, 74 involved a fire insurance claim brought by members of a family, the cause of the<br />
domestic fire being an act of arson by a 13 year old foster child. While the British Columbia Court of<br />
Appeal disallowed the claim, via contractual interpretation, it has been influential in sponsoring a<br />
legislative change in British Columbia 75 which, as a matter of law, is intended to open up a route to<br />
recovery for innocent persons. These amendments provide:<br />
(1) [I]f a contract contains a term of condition excluding coverage for loss or damage to<br />
property caused by a criminal or intentional act or omission of an insured or any other<br />
person, the exclusion applies only to the claim of a person<br />
(a) whose act or omission caused the loss or damage,<br />
(b) who abetted or colluded in the act or omission, [or]<br />
(c) who<br />
68<br />
69<br />
70<br />
71<br />
72<br />
73<br />
74<br />
75<br />
[2002] Lloyd‘s Rep IR 364.<br />
[2002] EWCA Civ 247.<br />
[2006] UKPC 30.<br />
[2009] EWHC 386 (QB).<br />
[1989] 1 SCR 1445<br />
(1985) 17 DLR (4 th ) 90<br />
[2003] BCCA 267<br />
<strong>Insurance</strong> Amendment Act 2009, s 28.6 (Innocent Co-Insured)<br />
173
(i) consented to the act or omission, and<br />
(ii) knew or ought to have known that the act or omission would cause the loss or<br />
damage<br />
8.41 The clause goes on to require the courts to award at most, that persons proportionate interest.<br />
While this provision is intended to benefit vulnerable insureds, the section would allow that interest to be<br />
further reduced if there was any prospect that the wrongdoer could benefit, directly or indirectly, form the<br />
recovery of the insurance monies awarded to that innocent party.<br />
(2) Nothing in subsection (1) allows a person whose property is insured under the contract to<br />
recover more than their proportionate interest in the lost or damaged property.<br />
8.42 The amendment was enacted as section 28.6 of the <strong>Insurance</strong> Act 2009. It is modelled on<br />
similar legislation enacted in the Provice of Alberta. The British Columbia Ministry of Finance published a<br />
February 2010 Discussion Paper which proposed to phase in the reform, requiring further legislative<br />
refinement by delegated legislation. In order to give effect to a legislative desire to protect innocent<br />
persons who are ―in abusive relationships‖, corporate entities will not be able to mount a claim. So as to<br />
meet reservations about this reform from the insurance industry, it was propsed that a claimant under<br />
section 28.6 should submit to an examination under oath on the request of the insurer. Submissions<br />
were also sought on the broader question of whether, in the words of the Consulation Paper:<br />
―the regulation should also specifically require that the claimant co-operate with the insurer in<br />
its investigation of the loss and provide all relevant information and documents in addition to<br />
those required by the contract. Since these duties may apply to other insurance claims as well,<br />
setting them out here could raise the implication that they apply only in these circumstances.<br />
As well, there are concerns that concepts like ―cooperate‖ might be too general and vague to<br />
be effectively, and fairly, administered.‖<br />
8.43 Section 28.6 along with new regulations which addressed the concerns raised in the<br />
Consultation Paper was brought into force on June 16 th , 2011 76 . These regulations require a claimant to<br />
co-operate with the insurer in respect of the investigation of the loss. Such co-operation includes, but is<br />
not limited to, submitting to an examination under oath and producing documents specified by the insurer<br />
that relate to the loss.The <strong>Commission</strong> consider that a procedure such as that enacted in British<br />
Columbia provides a more flexible mechanism than that found in the current English and Irish approach<br />
while not being as market insensitive as that of South Africa where the common law is seen as penal in<br />
nature. The British Columbia reforms suggest a direct and speedy mechanism which is preferable to<br />
requiring the applicant seeking to recover on the policy to show duress, undue influence or non est<br />
factum in litigation against the insurer.<br />
8.44 In the <strong>Law</strong> <strong>Commission</strong>‘s Issues Paper 6, the ―modern approach‖, as found in the various<br />
common law jurisdictions identified therein, is criticised as being result oriented rather than proceeding on<br />
the basis of what the contract means, as viewed at the formation of the contract: the ―modern approach<br />
works backwards. The courts decide what result they wish to reach in the circumstances, and then they<br />
characterise the policy as joint or composite accordingly.‖ 77<br />
8.45 This observation does not seem to be entirely fair or accurate. The same can be said of the<br />
blanket application of the forfeiture rule of law. Judges have in a joint policies context developed a<br />
forfeiture solution to a public policy question – moral hazard – that operates mechanically against<br />
innocent insureds. The <strong>Commission</strong> believes that a more flexible solution is necessary.<br />
8.46 The <strong>Commission</strong> does agree that in relation to misrepresentations made at formation of the<br />
contract that a fraudulent misrepresentation made by one co-insured on a joint policy should be binding<br />
on all other co-insureds. The <strong>Law</strong> <strong>Commission</strong>s take this position in their Issues Paper 7. The<br />
<strong>Commission</strong> also agrees with the <strong>Law</strong> <strong>Commission</strong>s that a distinction is to be drawn between wrongful<br />
acts at formation and wrongful acts after the contract has been formed:<br />
76<br />
77<br />
BC Reg 115/2011<br />
Issues Paper 7, para 5.46.<br />
174
―The problem is that two people may act together in taking out insurance, but may act<br />
separately at the time of the deliberate destructive act or fraudulent claim. If, for example, a<br />
wife asks her husband to take out insurance on their home we think it is fair to hold her<br />
responsible for the husband‘s lie on the application form. It would be unfair, however, to hold<br />
her responsible for her husband‘s arson or wilful fire-raising several months later, especially<br />
where this constituted an attempt on her life.‖ 78<br />
8.47 The limited reform that the <strong>Law</strong> <strong>Commission</strong>s put forward on this question is as follows: a<br />
presumption should be enacted which provides that, when insurance is secured by two or more persons<br />
to insure their joint interests, any fraud committed by one party should be regarded as having been done<br />
by all parties. Should a joint policyholder prove the act or omission was not done on their behalf or with<br />
their knowledge the innocent policyholder‘s share of the claim should be paid. 79 On the scope of the<br />
recovery remedy the <strong>Law</strong> <strong>Commission</strong>s ask:<br />
―Should the legislation provide that the recovery will be limited to the innocent insured‘s own<br />
interest, and will only be payable if the guilty insured would not benefit from any recovery? 80<br />
8.48 The <strong>Commission</strong> has reached the conclusion that, on the forfeiture rule of law for post contract<br />
formation fraud, the law, as it has generally developed, rightly seeks to encourage honesty and good faith<br />
dealings in the presentation and authentication of claims. 81 The <strong>Commission</strong> agrees that the approach<br />
taken in the courts in England and Scotland in isolating section 17 of the Marine <strong>Insurance</strong> Act 1906 from<br />
this duty is a sensible one. The remedy that would be available if section 17 (or indeed the duty of good<br />
faith at common law were to govern this situation) that is, retrospective avoidance, would be<br />
unacceptable and disproportionate in its effects.<br />
8.49 However, the <strong>Commission</strong> also considers it odd that in the co-insurance situation the law<br />
draws a distinction between joint insurance and composite insurance for the purpose of the forfeiture<br />
provision insofar as an innocent party under a composite policy could recover even if payment on the<br />
composite policy would benefit the wrongdoer. The <strong>Commission</strong> notes that Rix J, in State of Netherlands<br />
v Youell and Hayward 82 suggested that even under a composite policy forfeiture may apply if in effect the<br />
wrongdoer benefits from the innocent parties‘ claim. The <strong>Commission</strong> thinks that any formulation of the<br />
forfeiture rule in Irish law should require the courts to ―police‖ the innocent claim, regardless of the nature<br />
of the policy. To this extent the British Columbia proposals appear to be soundly based. On the<br />
substantive question of whether a move towards the ―modern approach‖ should be adopted, the<br />
<strong>Commission</strong> would favour giving the British Columbia and Alberta position a detailed examination and<br />
have formed the preliminary view that this kind of legislative development would be preferable to the<br />
existing position and a more structured alternative to a broad judicial discretion along the lines of the<br />
Australian 1984 Act, section 31.<br />
8.50 The <strong>Commission</strong> provisionally recommends that the law should continue to provide that an<br />
insured should be prohibited from recovering on a claim by submitting a fraudulent claim or fraudulent<br />
evidence to support a claim; but that it should also provide that an innocent co-insured or beneficiary may<br />
recover on a proportionate basis; provided that the fraudulent insured cannot benefit from the policy.<br />
H<br />
Is there a duty in claims processing?<br />
8.51 The two most important observations on the duty of utmost good faith that may be owed by an<br />
insurer to an insured given by the English and Scottish courts suggest a strong difference of opinion. In<br />
78<br />
79<br />
80<br />
81<br />
82<br />
Issues Paper, para 5.48.<br />
Issues Paper 7, paras 5.49 and 7.46.<br />
Issues Paper 7, paras 5.49 and 7.46, endorsing Higgins v Orion <strong>Insurance</strong> Co Ltd (1985) 17 DLR (4th) 90,<br />
discussed at para. 5.28 of the Issues Paper.<br />
In Chapter 10 the <strong>Commission</strong> will discuss whether a broader power to allow linked claims as part of a judicial<br />
discretion should be introduced.<br />
[1997] LRLR 94.<br />
175
<strong>Insurance</strong> Corporation of the Channel Islands v McHugh 83 Mance J advanced the view, within the context<br />
a counterclaim by an insured alleging unreasonableness in rejecting an insurance claim, that any fraud<br />
would breach this aspect of the duty of utmost good faith. In contrast, in Fargnoli V GA Bonus plc 84 Lord<br />
Penrose expressed the view, obiter:<br />
―Of course it follows from the mutuality of the obligation of utmost good faith that an insurer has<br />
similarly rigorous duties in dealing with claims. It mist be open to question whether an insurer<br />
would be in good faith in delaying an admission of liability, or in advancing spurious defences<br />
to a claim, or to put the insured to proof of what the insurer knows is true, or in delaying<br />
settlement of claims which he would, objectively, be obliged to admit before a court to be<br />
valid.‖ 85<br />
8.52 In other words, fraud is a requirement in English law while the Scottish position is not so<br />
restrictive. There is however a recent Irish High Court decision 86 which appears to side with the position<br />
taken by Lord Penrose but there is no clear Irish judicial decision on this in a claims context. One could<br />
of course extrapolate from McCarthy J‘s speeches in Aro Road and Kelleher v Irish Life that honesty is<br />
required and that, in this context, honesty has a broader meaning than not acting fraudulently: recall the<br />
Financial Regulator‘s 2012 Code of Practice which requires a regulated entity in all its dealings with its<br />
customers to act ―honestly, fairly and professionally in the best interests of its customers and the integrity<br />
of the market‖.<br />
8.53 Despite the asserted mutuality of the principle of good faith in the Marine <strong>Insurance</strong> Act 1906, s<br />
17, judicial examination of the application of the principle, not surprisingly, normally focuses on the<br />
behaviour of the proposer/insured. It is therefore useful to consider some recent examples of<br />
circumstances in which it may be argued that insurers have failed to exercise good faith.<br />
8.54 First, it has notoriously been held, in Sprung v Royal <strong>Insurance</strong> (UK) Ltd 87 — paradoxically,<br />
given that insurance is presumably meant to provide the insured with protection in the event of a loss—<br />
that there is no effective sanction against an insurer who procrastinates in discharging his liability to pay<br />
an indemnity: court interest will be due but not damages for consequential loss.<br />
8.55 Secondly, in Drake <strong>Insurance</strong> Plc v Provident <strong>Insurance</strong> Plc 88 an insured failed to disclose a<br />
speeding conviction which, if it had been disclosed when the contract was negotiated, would not have<br />
affected the insurer. Nonetheless, the insurer purported to avoid the policy. In the circumstances, the<br />
English Court of Appeal held that the insurer had not shown that he been induced by the non-disclosure<br />
and so was not entitled to avoid the policy. That rendered necessarily obiter the Court‘s speculation that<br />
an insurer might be disentitled to rescind for lack of good faith, in failing to ascertain whether the<br />
circumstances were in fact such that it would not have been induced by the non-disclosure. However,<br />
despite raising the possibility, the Court of Appeal generally registered a reluctance to go so far. 89<br />
83<br />
84<br />
85<br />
86<br />
87<br />
88<br />
89<br />
(1997) 6 Reinsurance <strong>Law</strong> Reports 374.<br />
[1997] CLC 653<br />
Ibid at 376.<br />
See the unreported account in the Irish Times for May 13, 2009, ―€30,000 awarded to solicitor or over fraud<br />
accusation against him.‖<br />
[1999] Lloyd‘s Rep IR 111 (CA). See J Lowry and P Rawlings, ―Insurers, Claims and the Boundaries of Good<br />
Faith‖ (2005) 68 MLR 82.<br />
[2003] EWCA Civ 1834.<br />
[2004] QB 601, 626–630, 642–643, 646–650 (per Rix, Clarke and Pill LJJ respectively) and the cases there<br />
cited, in particular Brotherton v Asegurodora Colseguros SA (No. 2); [2003] Lloyd‘s Rep IR 746; noted R Gay<br />
[2004] LMCLQ 1 (rejecting Colman J‘s view in Strive Shipping Corp v Provident Ins Plc (The Grecia Express);<br />
[2002] 2 Lloyd‘s Rep 88) that the insurer‘s right to avoid is dependent upon the insurer‘s good faith or good<br />
conscience)..<br />
176
8.56 Thirdly, in Diab v Regent <strong>Insurance</strong> Co Ltd (Belize) 90 the insured argued that the insurer‘s<br />
entitlement to rely on a term was subject to a duty of good faith to warn the insured that he had to act<br />
promptly in making his claim. The Privy Council stated obiter that good faith obligations might have been<br />
in point had the insured asked for an extension of time in providing the requisite particulars and the<br />
insurer had refused.<br />
8.57 Fourthly, in Goshawk Dedicated Ltd v Tyser & Co Ltd 91 it was held by the Court of Appeal that<br />
there was in insurance contracts made in the Lloyd‘s market an implied term that placing and claims<br />
documents which have previously been shown to underwriters, and premium accounting documents<br />
which are necessary for the operation of the contract, where retained by the insureds‘ Lloyd‘s brokers,<br />
should be available to the underwriters in cases of reasonable necessity. Rix LJ, effectively delivering the<br />
judgment of the Court of Appeal held that ―the implication is to be made on the traditional basis that it is<br />
necessary for business efficacy‖. 92 Rix LJ added that the duty of good faith extends to other classes of<br />
documents as well: ―An example of such an implication, made for the purposes of business efficacy but<br />
informed by the insurance context of good faith, can be found in Phoenix General <strong>Insurance</strong> Co of<br />
Greece SA v Halvanon <strong>Insurance</strong> Co Ltd, 93 where Hobhouse J accepted an implied term which extended<br />
to the obligation to keep proper accounting records and to make them reasonably available to reinsurers<br />
as being something which ‗would probably be imported anyway by the duty of good faith‘.‖ 94 In both<br />
Goshawk and Phoenix the court‘s decision was, in the absence of a governing rule expressed by law or<br />
contract, focused on and correctly arrived at by the traditional process of implication of a term for<br />
business efficacy. In both cases, there are obiter dicta that the decision is supported by ―the duty of good<br />
faith‖. But in neither case was consideration given to the implications of recasting the duty as one of good<br />
faith.<br />
8.58 In summary, a duty of good faith on the insurer has been conceded by Lord Mansfield in Carter<br />
v Boehm, and supported by the principle of mutuality in the Marine <strong>Insurance</strong> Act 1906, s 17 and by<br />
implication in recent judicial dicta; but it has yet to find expression in binding authority. On one view,<br />
authoritative recognition of such a duty is only a matter of time, for, as the cases indicate, there are a<br />
number of situations in which insurers could be expected to behave better towards insureds. 95 However,<br />
a fundamental difference between the circumstances in which the insured‘s and the insurer‘s possible<br />
duties might arise indicates that an insured is unlikely to have a remedy of avoidance for the insurer‘s lack<br />
of good faith: for, whereas the duty lying on the insured arises, primarily at least, pre-contractually, the<br />
situations in which an insurer might be expected to behave with good faith are mainly post-contractual (in<br />
relation to the processing of claims) and therefore more likely to be recognised, if at all, as the subject of<br />
implied contractual terms, consequently with different remedies for breach. Even so, a shift in the<br />
perception of the nature of an insurance contract is likely to be necessary before greater duties on the<br />
insurer are established. An insured‘s pre-contractual duty of disclosure is an understandable concomitant<br />
of a contract of which the main concern is the risk to the subject-matter of the insurance. A more bilateral<br />
interpretation—balancing the risk of a casualty‘s occurring against the risk of the insurer‘s unsatisfactorily<br />
processing of the claim — needs to be more clearly recognised in order for good faith duties resting on<br />
the shoulders of the insurer to be sanctioned by judicial decision.<br />
8.59 Apart from asserting that the law does not allow the award of damages to compensate<br />
insureds for the insurers failure to handle a claim within reasonable time, Eggers puts forward a number<br />
of arguments suggesting that such a development would be undesirable:<br />
―As a matter of policy, absent fraud on the part of the insurer, there are several reasons why<br />
the insurer should not be answerable for consequential losses. First, insurance cover serves<br />
90<br />
91<br />
92<br />
93<br />
94<br />
95<br />
[2006] UKPC 29.<br />
[2006] 1 Lloyd‘s Rep 566.<br />
Ibid, p.576; Mills, Duty of Good Faith (2006) 80 ALJ 397.<br />
[1988] QB 216.<br />
Ibid, p.241.<br />
Eggers in Soyer, <strong>Reform</strong>ing Marine and Commercial <strong>Insurance</strong> <strong>Law</strong> (Informa <strong>Law</strong> 2008) at 251.<br />
177
not only an economic purpose, but also a social purpose. It facilitates commercial enterprise<br />
and provides protection to those who suffer harm. By increasing the possible exposure on the<br />
part of the insurers may well render risk management and reserving policies problematic and<br />
make the cost of insurance inordinately high.<br />
Secondly, the insurer is not in fact guilty of a breach of duty or a wrongdoing in causing the<br />
insured loss; it has merely agreed to bear the risk of that loss. It would be inappropriate to<br />
treat the insurer‘s ―breach‖ in the same way as a party guilty of a breach of duty. Thirdly, the<br />
consequential losses are not those which the insurer has agreed to bear under the policy. For<br />
example, if a property insurer agrees to indemnify the assured for physical loss of a factory, the<br />
financial losses associated with the assured being deprived of the use of that factory does not<br />
fall within the insurer‘s remit. Indeed, such losses are specifically insurable. Fourthly, it is<br />
unlikely that such consequential losses will satisfy the rules of remoteness, as the additional<br />
losses likely to be borne by the assured are based on the latter‘s impecuniosity, which in many<br />
cases might not be reasonably foreseeable or in the contemplation of the parties when the<br />
contact of insurance is concluded.‖ 96<br />
8.60 The first argument ignores the causal link between late payment of the claim and subsequent<br />
damage to the ―commercial enterprise‖, or individual policyholder, as being a sine qua non to recovery of<br />
damages, while insurance costs will only increase if insurers process claims inefficiently – these<br />
increased costs can be avoided by effective claims handling. The second objection, in Ireland, is beside<br />
the point because the law will change to impose a duty upon the insurer as a result of the <strong>Commission</strong>‘s<br />
provisional recommendations. Eggers‘ third objection has some merit but it is the existence of the duty to<br />
process claims with all reasonable speed, and the insurer‘s breach of it, that triggers this head of loss.<br />
The fourth objection, that damages might not in fact be awarded, the <strong>Commission</strong> consider to be an<br />
argument in favour of making this rather modest adjustment to the law.<br />
8.61 Eggers puts forward a number of arguments that support the view that an insurer, absent<br />
fraud, should not be liable for consequential losses. While these are persuasive in some respects it<br />
should be noted that Eggers favours a limited duty on the insurer in respect of claims handling because<br />
he believes that the duty of good faith is, or should be, the basis of an insured‘s duty not to make<br />
fraudulent claims. Indeed, Eggers takes the view that an insurer will be liable if the insurer makes a<br />
knowing misrepresentation of fact, and probably of law, in their handling of a claim; this will be a breach of<br />
the duty of utmost good faith. Eggers is no doubt correct in making the argument that a fraudulent<br />
misrepresentation of this kind is actionable, but it is difficult to see why this forms part of the law on<br />
utmost good faith in insurance law, as distinct from actionable misrepresentation in tort.<br />
8.62 In any event, the question of whether consequential losses should be recoverable and the<br />
basis of liability are distinct issues. Certainly, if the action is established via fraudulent misrepresentation<br />
then all consequential losses will be recoverable as the existing rules on remoteness of damage in deceit<br />
now stand. In the case of an insured being able to establish that the claim was not processed by<br />
reference to a duty to take all reasonable steps to settle a claim promptly, for example, 97 then such a duty,<br />
if cast as contractual, will attract first limb Hadley v Baxendale damages which can of course involve an<br />
element of lost profits in any case, and it would require communication of special circumstances for the<br />
damages to engage ―second limb‖ Hadley v Baxendale damages. The <strong>Commission</strong> think that the<br />
exposure of insurers to claims for consequential loss, or indeed any kind of loss, is of itself a reason not<br />
to retain the existing law if it is unsatisfactory.<br />
I<br />
Has an insurer a right to damages against the insured?<br />
8.63 Oblique authority for the view that an admission of liability given by an insured, to the prejudice<br />
of the insurer, can give rise to liability in damages, can be found in Car and General <strong>Insurance</strong><br />
96<br />
97<br />
Ibid<br />
Eg Hotel Services Ltd v Hilton International Hotels (UK) Ltd [2000] EWCA Civ 290; GB Gas Holdings v<br />
Accenture UK Ltd [2010] EWCA Civ 912<br />
178
Corporation, 98 but ―good faith‖ obligations that are breached by an insured have not attracted damages<br />
awards in the English or Irish courts. The same is not true in Canada. Damages awards have been<br />
given in favour of insurance companies for an insured‘s breach of the mutual duty of good faith by the<br />
Canadian courts. Indeed, these awards cover both compensatory damages and punitive damages. In<br />
Andruswi v Aetna Life <strong>Insurance</strong> Co of Canada 99 a policyholder was ordered to repay $260,000 in<br />
disability payments. Because the conduct of the insured constituted a marked departure from the<br />
ordinary standards of decent behaviour expected of an insured, censure in the form of punitive damages<br />
of $20,000 was regarded as appropriate.<br />
J<br />
Claims handling: An Alternative Approach?<br />
8.64 The PEICL in Chapter Six, Insured Event, contains a balanced set of recommendations on the<br />
mutual duties that should perhaps attach to both the insurer and the insured in respect of claims made<br />
following the materialisation of risk.<br />
Article 6:101<br />
Notice of insured event<br />
(1) The occurrence of an insured event shall be notified to the insurer by the policyholder,<br />
the insured or the beneficiary, as appropriate, provided that the person obliged to give<br />
notice was or should have been aware of the existence of the insurance cover and of the<br />
occurrence of the insured event. Notice by another person shall be effective.<br />
(2) Such notice shall be given without undue delay. It shall be effective on dispatch. If the<br />
contract requires notice to be to be given within a stated period of time, such time shall<br />
be reasonable and in any event no shorter than five days.<br />
(3) The insurance money payable shall be reduced to the extent that the insurer proves that<br />
it has been prejudiced by undue delay.<br />
Article 6:102<br />
Claims Cooperation<br />
(1) The policyholder, insured or beneficiary, as appropriate, shall cooperate with the insurer in<br />
the investigation of the insured event by responding to reasonable requests, in particular for<br />
o<br />
o<br />
o<br />
information about the causes and effects of the insured event;<br />
documentary or other evidence of the insured event;<br />
access to premises related thereto.<br />
(2) In the event of any breach of para. 1 and subject to para. 3, the insurance money payable<br />
shall be reduced to the extent that the insurer proves that it has been prejudiced by the breach.<br />
(3) In the event of any breach of para. 1 committed with intent to cause prejudice or recklessly<br />
and with knowledge that such prejudice would provably result, the insurer shall not be obliged<br />
to pay the insurance money.<br />
Article 6:103<br />
Acceptance of Claims<br />
(1) The insurer shall take all reasonable steps to settle a claim promptly.<br />
(2) Unless the insurer rejects a claim or defers acceptance of a claim by written notice giving<br />
reasons for its decision within one month after receipt of the relevant documents and other<br />
information, the claim shall be deemed to have been accepted.<br />
98<br />
99<br />
[1936] IR 584<br />
(2001) 33 CCLI (3d) 238 (Alta. QB)<br />
179
Article 6:104<br />
Time of Performance<br />
(1) When a claim has been accepted the insurer shall pay or provide the services promised, as<br />
the case may be, without undue delay.<br />
(2) Even if the total value of a claim cannot yet be quantified but the claimant is entitled to at<br />
least a part of it, this part shall be paid or provided with undue delay.<br />
(3) Payment of insurance money, whether under para. 1 or para. 2, shall be made no later than<br />
one week after the acceptance and quantification of the claim or pat of it, as the case may be.<br />
Article 6:105<br />
Late Performance 100<br />
(1) If insurance money is not paid in accordance with Article 6:104, the claimant shall be<br />
entitled to interest on that sum from the time when payment was due t the time of payment and<br />
at the rate applied by the European Central Bank to its most recent main refinancing operation<br />
carried out before the first calendar day of the half-year in question, plus seven percentage<br />
points.<br />
(2) The claimant shall be entitled to recover damages for any additional loss caused by late<br />
payment of the insurance money.<br />
K<br />
Recommendation on the duty of utmost good faith<br />
8.65 It is arguable that the universal duty of utmost good faith, if it exists at all, has outlived its<br />
usefulness, both in terms of requiring the proposer to disclose material facts whether prior to or after the<br />
conclusion of the contract. Certainly, the duty is irrelevant to the forfeiture rules governing fraudulent<br />
claims, and the current state of English law requires fraud by an insurer to be shown in relation to claims<br />
handling by an insurer if liability is to result. Why fraud should require to be dressed up in a breach of<br />
good faith argument as distinct from simply being actionable in the tort of deceit is not immediately<br />
apparent. The <strong>Commission</strong> considers that the law would not be any less effective if in Carter v Boehm<br />
Lord Mansfield had limited the duty to pre-contractual disclosure.<br />
8.66 The <strong>Commission</strong> considers that existing forfeiture of fraudulent claims case-law, as it has<br />
developed provides a generally satisfactory approach to what the <strong>Commission</strong> considers to be ―bad faith‖<br />
processing of claims by insurers. The same cannot be said for the law relating to possible ―bad faith‖<br />
processing of claims by insurers and the <strong>Commission</strong> favour the development of a more balanced<br />
bilateral/mutual approach to claims handling in the way sketched out in the PEICL, Article 6.<br />
8.67 This leaves open the question whether ―utmost good faith‖ should be retained as a guiding<br />
principle of Irish insurance contract law once the contract has been concluded. The <strong>Commission</strong><br />
envisage that if Article 6 of PEICL is adopted, most practical problems will be addressed therein. But the<br />
good faith principle will remain, as an aid to interpretation of the contract. It is possible to envisage<br />
disputes emerging in which a court might consider that an insurer might be under a good faith obligation<br />
(eg a duty to warn an insured that, based on specific facts known to that insurer alone, a risk is more<br />
likely to materialise than was previously thought to be the case).<br />
8.68 The <strong>Commission</strong> provisionally recommends that legislation should set out the mutual duties on<br />
the insured and the insurer in respect of claims handling, so that the principle of good faith would then<br />
remain relevant only to pre-contractual formation of the contract and as an aid to interpretation.<br />
100<br />
This Article is modelled on Article 3 para. 1 (d) Directive 2000/35/EC.<br />
180
9<br />
CHAPTER 9 THIRD PARTY RIGHTS 1<br />
A<br />
Introduction<br />
9.01 Irish law still retains two rules that limit the capacity of individuals to benefit from the terms of<br />
an insurance policy, even if it appears on the face of the policy that the individual or individuals in<br />
question were intended to benefit therefrom. These rules are that a person who is a stranger to a<br />
contract cannot enforce that contract, or be the subject of obligations under such a contract 2 - the Privity<br />
rule. The other rule states that consideration for a contract must move from a promisee if the promisee is<br />
to be able to enforce a promise. 3 There has been a considerable level of controversy surrounding these<br />
two rules and whether the two rules are simply two different ways of stating the same proposition of law.<br />
9.02 The most extensive discussion of these barriers to allowing a third party to directly enforce a<br />
contract of insurance took place in the High Court of Australia in Trident General <strong>Insurance</strong> Co Ltd v<br />
McNiece Bros Pty Ltd. 4 A workplace liability policy had been taken out by a company, BC. BC engaged<br />
contractors to carry out work on its behalf. An employee of the contractors was injured and the claim<br />
brought against the contractor by the employee was settled. The contractor, McNiece, sued Trident, the<br />
insurer even though Trident‘s contract of insurance had been taken out with Trident by B.C. This case<br />
predated the <strong>Insurance</strong> <strong>Contracts</strong> Act 1984, and therefore section 48 of the 1984 Act, discussed below,<br />
could not be invoked. A majority of the High Court of Australia found for McNiece. Mason CJ and Wilson<br />
J indicated that the ―principled development‖ of the common law required that the older, unjust privity rule<br />
ought not to be followed and that McNiece was entitled to succeed in the action. Toohey J agreed but he<br />
formulated a privity exception specific to liability insurance contracts involving contractors. Gaudron J<br />
followed an unjust enrichment path in order to allow McNiece the chance to recover while the remaining<br />
three judges, Brennan, Deane and Dawson JJ applied the privity doctrine and would have allowed<br />
Trident‘s appeal: while expressing little or no affection for the privity doctrine, in Brennan J‘s words, ―a<br />
doctrine which is both settled and fundamental,‖ Brennan J remarked that the proposed solution not only<br />
flew in the face of precedent, it created uncertainty over central issues such as whether the newly minted<br />
third parties‘ right to sue is irrevocable.<br />
9.03 The <strong>Commission</strong> cannot see the Irish Supreme Court following a decision such as the majority<br />
view in Trident General <strong>Insurance</strong> Co Ltd v McNiece Bros Pty Ltd. Such a course of action would in the<br />
opinion of the <strong>Commission</strong> be unnecessary and undesirable. The <strong>Commission</strong> has already examined the<br />
privity of contract question and has proposed legislative changes that will provide a more balanced<br />
response to the injustices that privity of contract can produce. 5<br />
1<br />
2<br />
3<br />
4<br />
5<br />
See generally Merkin Privity of Contract (LLP 2000) pages 44-53 (Merkin) and Chapter 9 (Henley): in Kelly<br />
and Ball, Principles of <strong>Insurance</strong> <strong>Law</strong> 2 nd ed (Butterworths 2001); Lowry and Rawlings <strong>Insurance</strong> <strong>Law</strong>,<br />
Doctrines and Principles 2 nd ed (Hart 2010) Ch. 6.<br />
Murphy v Bower (1876) 10 IRCL 354.<br />
McCoubray v Thompson (1868) 2 IRCL 354.<br />
(1988) 165 CLR 107; see generally Kincaid, Privity and the Essence of Contract (1989) 12 UNSWLJ 59.<br />
Consultation Paper on Privity of Contract (LRC <strong>CP</strong>40-2006); Report on Privity of Contract and Third Party<br />
Rights (LRC 88-2008).<br />
181
B<br />
The Problem in Context<br />
9.04 The decision of the Privy Council in Vandepitte v Preferred Accident <strong>Insurance</strong> Corporation of<br />
New York 6 clearly illustrates two formidable obstacles to third party recovery under an insurance contract.<br />
Mrs V was injured in a motor accident whilst travelling as a passenger in a vehicle. The driver of the<br />
other vehicle, Miss JB was a minor driving her father‘s vehicle with his permission. Miss JB was held to<br />
have been driving the vehicle negligently. Damages were awarded in favour of Mrs V but judgment was<br />
not satisfied; the relevant British Columbia statutory provision 7 indicated that where a person incurs<br />
liability for injury or damage, that person being insured, if there is judgment against that person which is<br />
unsatisfied, ―the person entitled to the damages may recover by action against the insurer the amount of<br />
the judgment up to the face value of the policy, but subject to the same equities as the insurer would have<br />
if the judgment had been satisfied.‖ While Miss JB‘s tort, as a minor, would have led to a claim 8 against<br />
her father, REB (who had given permission for Miss JB to drive the vehicle) being successful, Mrs V<br />
brought the action in tort against Miss JB directly, seeking to invoke the statutory provision above. While<br />
the British Columbia courts awarded damages against Miss JB‘s insurers, the Supreme Court of Canada<br />
overruled the Provincial Courts. 9 A further appeal to the Privy Council was dismissed. Lord Wright,<br />
giving judgment for the Privy Council indicated that in order to succeed under the British Columbia Statute<br />
it has to be shown that Miss JB was a party to the contract. In this regard, the policy itself referred to the<br />
insured and directed that the indemnity also extended to persons legally riding or operating the vehicle<br />
with the permission of the insured. Thus, while the indemnity was intended to be of benefit to Miss JB,<br />
the Statute could only be operative if Miss JB was insured against the liability. Lord Wright explained the<br />
thrust of Mrs V‘s arguments thus:<br />
―The contention was put in the alternative, either that Jean Berry was directly and in law a party<br />
to the contract being within the description of the persons other than R.E. Berry to whom the<br />
indemnity was available, or that, if not in law a party to the contract, she was cestui que trust of<br />
the promise contained in the contract to extend the indemnity to such a person as herself, R.E.<br />
Berry having so stipulated as trustee.‖ 10<br />
9.05 The first contention, that REB contracted as agent for his daughter, was rejected on the basis<br />
that there was not intention on REB‘s part to contract other than for himself. Even if some such intention<br />
existed ―he had no authority from [JB] to insure on her behalf and at no time did she purport to adopt or<br />
ratify any insurance even if made on her behalf.‖ Lord Wright also rejected the second contention, that is,<br />
that the ―insured‖ could be interpreted so as to describe both REB and Miss JB because REB created a<br />
trust in the insurers promise to indemnify for Miss JB as a beneficiary. Again, the action failed for want of<br />
any proof that REB had any intention to constitute a trust in the form of the promise of indemnity; if<br />
anything was likely to follow from persons being injured whilst Miss JB was driving his motor vehicle.<br />
JEB, ―if he read the clause or thought about the matter at all, he would naturally expect that if she did<br />
damage, the claim would, under the Act quoted, be against him, as she was a minor living in his family.‖ 11<br />
9.06 With the exception of the specific provisions that have been enacted in road traffic legislation in<br />
order to address compelling public policy considerations arising out of motor accident claims, Irish law still<br />
reflects Vandepitte in respect of third party ―rights‖ in insurance contract law. While there are some<br />
nineteenth century decisions that pre-date the Vandepitte analysis (eg Kenney v Employers‟ Liability<br />
<strong>Insurance</strong> Corp 12 ) and which suggest a more ‗liberal‘ approach to the agency or trust exceptions, the<br />
6<br />
7<br />
8<br />
9<br />
10<br />
11<br />
12<br />
[1933] AC 70.<br />
Section 24 of the <strong>Insurance</strong> Act 1925 (British Columbia).<br />
Section 27, Motor Vehicles Amendment Act 1927 (British Columbia).<br />
Preferred Accident Ins Co Of New York v Vandepitte [1932] SCR 22. Contrast Fraser River Pile and Dredge<br />
Ltd v Can-Drive Services Ltd [1998] 3 WWR 177.<br />
[1933] AC 70 at 76-77<br />
[1933] AC 70 at 80<br />
[1901] 1 IR 301.<br />
182
general view that the <strong>Commission</strong> takes in relation to insurance contract law reform and third party rights<br />
mirrors the position taken in the 2008 Privity Report. In other words, while it should remain possible for a<br />
court to utilise and even develop the existing exceptions to the Privity doctrine, it will not suffice to leave<br />
the resolution of difficult questions arising out of third party rights in insurance law to the existing<br />
patchwork of common law rules and exceptions, equitable remedies and ad hoc legislative solutions.<br />
C<br />
Third party recovery – What the <strong>Commission</strong> will not address<br />
(1) Road traffic legislation<br />
9.07 Section 78 of the Road Traffic Act 1933 provides for situations in which compulsory motor<br />
insurance should be taken out and related matters such as an injured person‘s rights of direct recourse to<br />
the insurer (eg when the insured driver cannot be fund (eg Bellew v Zurich General Accident and Liability<br />
<strong>Insurance</strong> Co 13 ). Section 76(1) of the Road Traffic Act 1961 has replaced section 78 of the 1933 Act.<br />
The question of how road traffic victims are compensated when injured by uninsured drivers is not the<br />
subject of specific legislation. As between the Government and the Motor <strong>Insurance</strong> Industry, an<br />
agreement dating back to 1955 has provided a mechanism whereby claimants may seek a remedy from<br />
the Motor <strong>Insurance</strong> Bureau for Ireland Fund in respect of loss or injury caused by an untraced or<br />
uninsured driver. 14 This scheme is funded via a levy on insurers. The <strong>Commission</strong> believe that because<br />
this system is the result of specific legislation and Industry/Government agreement it is outside our terms<br />
of reference. Another reason why the <strong>Commission</strong> believes that this issue cannot be reviewed within the<br />
context of Irish insurance contract law can be found in the fact that the European legislator has intervened<br />
in this area on many occasions. In 2010 the English Court of Appeal, in Churchill <strong>Insurance</strong> Co v<br />
Wilkinson 15 referred section 151(8) of the Road Traffic Act 1988 (a provision barring an injured person<br />
from recovering damages when travelling in a vehicle as a passenger when the driver is uninsured) to the<br />
ECJ so as to test the section by reference to Article 13(1) of Directive 2009/103/EC, the Consolidated<br />
Motor <strong>Insurance</strong> Directive. Article 13(1) provides that the bar to recovery is limited to passengers injured<br />
whilst travelling in stolen vehicles.<br />
(2) Employers Liability<br />
9.08 The rather sophisticated legislative mechanisms that the compulsory motor insurance model<br />
has created serves to point up how deficient the law currently stands in relation to employer‘s liability.<br />
While the motor insurance industry has created a fund of last resort to compensate injured persons when<br />
compulsory motor insurance has not been taken out, no similar system is in place in regard to workers<br />
injured in their place of employment due to an industrial disease, the relevant insurer being untraceable or<br />
the employer not being insured in respect of the injury. 16 The <strong>Commission</strong> is aware that a Consultation<br />
Process was started in the United Kingdom by the Department of work and Pensions in February 2010 17<br />
with a view to establishing an Employer‘s Liability <strong>Insurance</strong> Bureau; a Private Members Bill was<br />
introduced into the UK Parliament by Andrew Dismore MP in January 2009. The Association of British<br />
Insurers is opposed to such legislation on moral hazard gounds, ie law abiding employers will have to<br />
subsidise unscrupulous employers who fail to take out appropriate insurance in the knowledge that the<br />
Fund will support injured workers. 18<br />
13<br />
14<br />
15<br />
16<br />
17<br />
18<br />
[1937] Ir Jur Rep 69;Hayes v Legal <strong>Insurance</strong> Co Ltd [1941] Ir. Jur. Rep. 49; Power v Guardian PMPA Ins<br />
[2007] IEHC 105.<br />
See www.mibi.ie<br />
[2010] Lloyd‘s Rep IR 591. Section 151(8) has been held incompatible with with EU law – Case C-442/10,<br />
ECJ decision of December 2, 2011.<br />
See O‘Sullivan, [1995] CLJ 241. Note that employer‘s liability insurance in the UK has been mandatory since<br />
1969.<br />
Consultation Document, Accessing Compensation – Supporting People who need to trace<br />
In reply to a written question to Minister of State Chris Grayling on 22 March 2011 the Minister of State said<br />
the Government would bring forward ―proposals in due course‖.<br />
183
D<br />
Exceptions to the Privity Rule<br />
(1) Exceptions via judge-made law<br />
(a)<br />
Agency<br />
9.09 The law of agency allows a principal to enforce a contract even if the principal is undisclosed or<br />
the principal‘s identity is unknown. It is now clear that this situation is applicable to insurance contracts. 19<br />
Situations where the agency exception has been invoked in general terms involve sometimes convoluted<br />
contractual analysis in response to commercially compelling circumstances. 20<br />
(b)<br />
Trusts<br />
9.10 This was at the heart of the Vandepitte litigation and cases such as Watrs v Monarch Life and<br />
Fire <strong>Insurance</strong> 21 consider the ―trust‖ notion as a kind of duty following upon bailment of goods. Resort to<br />
the trust concept is uncertain in terms of results as an intention to create a trust must be found if the<br />
argument is to be made out.<br />
(c)<br />
Assignment<br />
9.11 Indemnity policies create a chose in action 22 which is assignable under the common law,<br />
equitable and statutory rules on the assignment of choses in action. An examination of the law of<br />
assignment is outside the scope of this Consultation Paper but the assignability of insurance contracts,<br />
and the right to insurance moneys represent a very significant privity exception, constrained as it is only<br />
by the insurable interest requirement for the assignor in life policies. 23<br />
(d)<br />
Statutory Exceptions<br />
9.12 The injustice that decisions such as Vandepitte create has been recognised by the Oireachtas<br />
by way of a number of statutory enactments that allow third parties to proceed against an insurer.<br />
9.13 Section 7 of the Married Women‟s Status Act 1957, based largely upon section 11 of the<br />
Married Women‟s Property Act 1882 provides that a policy of life assurance or endowment expressed to<br />
be for the benefit of, or by its express terms purports to confer a benefit upon, the spouse or child of the<br />
insured, is enforceable by that spouse or child by way of a statutory trust.<br />
9.14 Section 76(1) of the Road Traffic Act 1961 24 allows a third party making a claim in respect of<br />
injuries or damage caused by an insured motorist to proceed directly against the motorist‘s insurer by way<br />
of service of a notice detailing the claim or a judgment obtained against the insured.<br />
9.15 Section 62 of the Civil Liability Act 1961 affords a third party with rights to proceed against an<br />
insurer in cases of the death or personal or corporate bankruptcy of the insrued. Section 76(4) of the<br />
Road Traffic Act 1961 contains a similar provision. In the 2008 Report on Privity of Contract, the effect of<br />
section 62 is stated at paragraph 1.43 (footnotes abridged):<br />
―Section 62 of the Civil Liability Act 1961 states that where an individual who has effected a<br />
policy of insurance in respect of liability or a wrong becomes a bankrupt or dies, moneys<br />
payable to the insured under the policy are only applicable in discharging valid claims against<br />
the insured. No part of the insurance money is to be applicable to the payment of the other<br />
19<br />
20<br />
21<br />
22<br />
23<br />
24<br />
Siu Yin Kwan v Estern <strong>Insurance</strong> Co Ltd [1994] 2 AC 199: National Oilwell Ltd v Davy Offshore (UK) Ltd<br />
[1993] 2 Lloyd‘s Rep 582.<br />
Prentis Donegan and Partners Ltd v Leeds and Leeds Co [1998] 2 Lloyd‘s Rep 326. See also The Zephyr<br />
[1985] 2 Lloyd‘s Rep 529.<br />
(1856) 26 LT 217. See also Commercial trusts relating to goods such as the jewellers‘ block policy.<br />
Re Moore, Ex parte Ibbetson (1878) 8 ChD 519.<br />
See generally MacGillivray, Ch 20. Life policies have been assignable since the Policies of Assurance Act<br />
1867: MacGillivray, Ch 24.<br />
Hayes v Legal <strong>Insurance</strong> Co [1941] Ir Jur Rep 40; Herlihy v Curley [1950] IR 15; O‟Leary v Irish National<br />
<strong>Insurance</strong> Co [1958] Ir Jur Rep 1.<br />
184
debts of the insured. The section 62 of the 1961 Act represents a policy decision to separate<br />
insured debts from insolvency proceedings. Although it does not expressly confer a positive<br />
right of action on those entitled to an award of damages against the insured, it has been<br />
decided that this section gives an entitlement to an injured party to sue the insurers of a<br />
bankrupt party to ensure compliance with the section. 25<br />
9.16 While section 62 is clearly very useful in cases of deceased or insolvent insureds, and recent<br />
case-law illustrates that there are other more indirect routes whereby a third party creditor may obtain<br />
access to insurance policy proceeds, 26 such piecemeal solutions, especially when no direct right of action<br />
or implementing machinery is included, do not create the necessary clarity and certainty required in this<br />
difficult area of the law.<br />
9.17 The <strong>Commission</strong> notes that in the United Kingdom the <strong>Contracts</strong> (Rights of Third Parties) Act<br />
1930 was much criticised in the way in which it operated in the context of insolvency. The <strong>Commission</strong><br />
speculate on whether section 62 of the Civil Liability Act 1961, a model of brevity, has had greater<br />
success in Ireland than the 1930 Act has had in the United Kingdom. Criticism of the 1930 Act was<br />
expressed by the <strong>Law</strong> <strong>Commission</strong>:<br />
―owing to the way the 1930 Act has been applied by the courts, third parties are often not<br />
assisted by it at all or are unnecessarily required to expend substantial time and money<br />
enforcing their rights.‖ 27<br />
9.18 The Third Parties (Rights against Insurers) Act 2010, repeals the 1930 Act but builds upon the<br />
1930 Act insofar as both Acts transfer to a claimant an insured‘s rights against an insurer, once the<br />
insured has been shown to be both liable on the claim and insolvent within the terms of the legislation.<br />
The most important reform effected by the 2010 legislation relates to the possibility that the claimant can<br />
commence one set of proceedings so as to establish the insured‘s liability and the insurer‘s obligation to<br />
indemnify the claimant. The 2010 legislation also removed the third parties‘ requirement to restore a<br />
dissolved company to the register of companies before being able to sue it. The enhanced information to<br />
be disclosed is also much expanded. However, the failure to amend the insurer‘s defences provisions in<br />
some significant ways has attracted criticism. 28<br />
9.19 The <strong>Commission</strong> has a limited amount of information on how section 62 of the Civil Liability Act<br />
1961 operates. The <strong>Commission</strong> notes that in the United Kingdom the <strong>Contracts</strong> (Rights of Third Parties)<br />
Act 1999 did not render the Third Parties (Rights against Insurers) Act 1930 redundant: 29 indeed, the<br />
recent passage of the Third Parties (Rights and Insurers) Act 2010 suggests that there may well be a<br />
need to review existing Irish legislation having the same effect.<br />
25<br />
26<br />
27<br />
28<br />
29<br />
Citing Dunne v PJ White [1989] 1 ILRM 803.<br />
Section 62 has been recently considered in one of a series of decisions arising out of product liability claims<br />
resulting form the dioxin pigmeat contamination controversy in late 2008. In Millstream Recycling Ltd v<br />
Companies Acts [2009] IEHC 571, application for holding a meeting of creditors under section 201 of the<br />
Companies Act 1963 was brought, the creditors in question being purchasers of contaminated animal feed<br />
from the applicant company. These creditors were divided on whether to agree to a composition which would<br />
have averted the winding up of the applicant company (and thus short-circuit the application of section 62), the<br />
creditors being compensated pro rata from FBD product liability insurance. It is clear that section 201 of the<br />
Companies Act 1963 will allow the court to hear both the creditors and the insurer even thought the creditors<br />
are clearly not party to the insurance contract. Laffoy J ordered a meeting be held under section 201 of the<br />
1963 Act.<br />
<strong>Law</strong> Com No. 272, 31 July 2001, para 1.5. For a recent decision see William McIlroy (Swindon) Ltd v Quinn<br />
<strong>Insurance</strong> [2011] EWCA Civ 825.<br />
See <strong>Law</strong> <strong>Commission</strong> Report 272, Part 5: Hemsworth [2010] LMCLQ 376.<br />
See Merkin, in Lowry and Rawlings, <strong>Insurance</strong> <strong>Law</strong>, Doctrines and Principles 2 nd ed (Hart 2010) at 344-352 for<br />
an account of the 1930 Act.<br />
185
9.20 Because Ireland has not adopted the 1930 Act, the <strong>Commission</strong> cannot give a considered view<br />
on whether legislation of this kind is in need of revision. Any such recommendations should in any case<br />
be seen in the context of Irish insolvency law rather than Irish insurance contract law and the <strong>Law</strong><br />
<strong>Commission</strong> in its 2001 Report stressed that privity of contract and the 1930 Legislation raised different<br />
issues. For example, the <strong>Law</strong> <strong>Commission</strong> took the view that even the implementation of the <strong>Contracts</strong><br />
(Rights of Third Parties) Act 1999 would not support an argument that the 1999 legislation rendered the<br />
1930 Act redundant because:<br />
insurers would not write insurance contracts so as to enable third parties to rely on the 1999 Act,<br />
rights to information about the insurance position of persons against whom claims are<br />
considered are not addressed in the 1999 Act.<br />
9.21 On the other hand, there are some features of the 2010 legislation that do provide some<br />
improvements to insurance contract law rules on notification. Conditions that oblige an insured to provide<br />
information are rendered ineffective if the insured has ceased to exist through death or corporate<br />
dissolution, for example, 30 and notification conditions are now capable of being complied with by the<br />
claimant as well as the insured. 31<br />
9.22 The <strong>Commission</strong> proposes that section 62 of the Civil Liability Act 1961 should be augmented<br />
by borrowing from section 51 of the Australian <strong>Insurance</strong> <strong>Contracts</strong> Act 1984. That section, in a much<br />
less detailed form, replicates the provisions in section 62 of the Civil Liability Act 1961. However, the<br />
reference in section 51 to an insured who cannot, after reasonable enquiry, be found, appears to the<br />
<strong>Commission</strong> to be a useful addition to those sections and the <strong>Commission</strong> recommends that those<br />
sections in the two 1961 Acts be amended to include those untraceable insureds.<br />
9.23 The <strong>Commission</strong> provisionally recommends that section 62 of the Civil Liability Act 1961<br />
should be extended to allow a third party to proceed against the insurer where the insured cannot be<br />
located.<br />
E Insurable Interest and Privity 32<br />
9.24 The decision in Vandepitte v Preferred Accident <strong>Insurance</strong> Corporation of New York 33 also<br />
addressed the insurable interest question, the Privy Council holding that the insured, father of the driver<br />
of the vehicle which caused the appellants injury, had no insurable interest at law. The Privy Council held<br />
that the property exceptions such as those developed in Waters v Monarch Life and Fire <strong>Insurance</strong> Co 34<br />
had no application. The <strong>Commission</strong>‘s provisional recommendations, in Chapter 2 of this Consultation<br />
Paper, particularly the recommendation that the fact that an insurance claim should not of itself fail<br />
because of the absence of an insurable interest (as traditionally defined) would remove this aspect of the<br />
Privy Council‘s judgment from forming a part of Irish law. Additionally, the fact that Irish law does not<br />
expose non life policies where an insurable interest does not exist to the full rigour of the Gaming and<br />
Lotteries Act 1956 is also to be welcomed in the context of a modern and effective system of regulating<br />
gambling. It should be noted that while English case-law at one stage 35 inclined towards the view that<br />
absence of an insurable interest will lead to the conclusion that the contract is a gaming contract, the<br />
better view is that ―if either party was not wagering, the contract is not a wagering contract.‖ 36<br />
30<br />
31<br />
32<br />
33<br />
34<br />
35<br />
36<br />
Corporate dissolution was proposed in the <strong>Law</strong> <strong>Commission</strong> Report at para 5.19. Section 9(3) of the 2010 Act<br />
also includes individuals who have died.<br />
Third Parties (Rights against Insurers) Act 2010, section 9(2).<br />
See generally Ch 6 of Lowry and Rawlings, <strong>Insurance</strong> <strong>Law</strong>, Doctrines and Principles 2nd ed (Hart 2010).<br />
[1933] AC 70; see also Jovanovic v Broers (1979) 25 ACTR 39, discussed at para 122 of ALRC Report No. 20<br />
(1982).<br />
(1856) 5 E & B 870; A Tomlinson (Hauliers) Ltd v Hepburn [1966] AC 451.<br />
Newbury International v Reliance National <strong>Insurance</strong> Co (UK) [1994] 1 Lloyd‟s Rep 83.<br />
Hobhouse J in Morgan Grenfell & Co v Welwyn Hatfield District Council [1995] 1 All ER 1 at 10.<br />
186
9.25 In the 2008 Report the <strong>Commission</strong> considered the relationship between the insurable interest<br />
question and the recommendations made in respect of statutory reform of the privity of contract<br />
requirement. In the Report the <strong>Commission</strong> recommended that the general privity reforms were not to<br />
affect the existing insurable interest requirements but that this recommendation did not ―preclude the<br />
possibility of the future reform of this rule.‖ 37 As this Consultation Paper recommends a broader definition<br />
of insurable interest as well as redrawing the categories of person who may be held to possess such an<br />
interest ie in the context of family and analogous relationships and does not recommend the introduction<br />
of any new insurable interest requirement in other non-life, non-indemnity policies, the statutory reforms<br />
outlined in the 2008 Report will not be in conflict with the insurable interest rules, as reformulated in this<br />
Consultation Paper. 38<br />
F<br />
Recommendations of the <strong>Commission</strong> in the 2008 Report<br />
9.26 The <strong>Commission</strong>, in the 2008 Report, suggested that it was undesirable to allow Irish contract<br />
law to retain a privity requirement and that judicial erosion of the doctrine or additional legislative<br />
adjustments were not satisfactory responses to the hardship that the privity doctrine could create.<br />
9.27 In the Report the <strong>Commission</strong> set forth six guiding principles, four of which were intended to<br />
protect the legitimate interests of contracting parties, while the last two were directed at third party<br />
interests, particularly the expectation interest, and the third parties‘ right to access rights to use<br />
contractual promises in a defensive way (eg rely on an exemption clause). 39 The <strong>Commission</strong> considers<br />
these six principles to be especially relevant in the context of insurance contracts.<br />
9.28 The <strong>Commission</strong>, in the 2008 Report, set out three circumstances in which a third party should<br />
be able to directly enforce the provisions in a contract, summarised at paras 3.17 to 3.19:<br />
―3:17 The <strong>Commission</strong> recommends that a third party should be able to enforce a term of a<br />
contract when the term expressly confers a benefit on the third party. However, the third party<br />
should not be able to enforce the term if it appears on a proper construction of the contract that<br />
the contracting parties did not intend the term to be enforceable by the third party. The<br />
contract should be interpreted in accordance with the ordinary rules of contractual<br />
interpretation, but surrounding circumstances should only be taken into account if they are<br />
reasonably available to the third party.<br />
3.18 The <strong>Commission</strong> recommends that a third party should be able to enforce a contract or a<br />
term of a contract when the contract expressly states that they may.<br />
3.19 The <strong>Commission</strong> recommends that a third party should have the right to rely on a term of<br />
a contract which excludes or limits the liability of the third party, provided that was the intention<br />
of the parties. This is subject to the normal statutory and common law rules on the<br />
incorporation and construction of exception clauses.<br />
9.29 Recent English case-law attests to the utility of changing the law. The question whether a<br />
person who is not in a contractual relationship with an insurance broker may nevertheless have a right of<br />
action in tort and/or contract, where the insurance is arranged for that person‘s benefit, was considered in<br />
the English High Court in Crowson v HSBC <strong>Insurance</strong> Brokers. 40 Crowson was the managing director of<br />
Hughes Brickwork Ltd. The company arranged new liability insurance cover through the defendants.<br />
Liability cover that had been arranged through their previous brokers gave directors and officers liability<br />
37<br />
38<br />
39<br />
40<br />
Report, para 3.124.<br />
This will still make it likely that an insurer will contractually seek to use an insurable interest requirement, as a<br />
matter of contract, to limit the scope of any non-indemnity policy for example. Even though section 16 of the<br />
1984 Act, as amended in 1995 abolishes insurable interest even in life policies, underwriting practice may<br />
require this – see Mann, Annotated <strong>Insurance</strong> <strong>Contracts</strong> Act, para. 18.20 cited by Merkin in his Australian<br />
Reverse Transportation Paper at para. 8.7.<br />
Report, paras 2.89-2.95.<br />
[2010] Lloyd‘s Rep IR 441.<br />
187
cover but the defendants failed to renew or obtain this cover. The failure to do so was alleged by<br />
Crowson to constitute various breaches of a common law duty of care owed by the defendant brokers to<br />
Crowson as a director of the insured. The defendant argued that it owed Crowson no duty of care and<br />
that the only contractual duty existed vis-à-vis the defendant and Hughes Brickwork Ltd. Although the<br />
case was decided on the foot of a motion to strike out the case for want of a cause of action, Master<br />
Bragge was prepared to hold that it was arguable that a duty of care existed when a broker was<br />
instructed to arrange insurance for that person and others; also (and here Master Bragge was stating an<br />
alternative argument, based on Punjab National Bank v De Boinville 41 and Ross v Caunters 42 ) a duty<br />
could exist if a broker can be taken to be aware that the company instructing the broker intended the<br />
policy to cover directors and officers. While Master Bragge indicated that there was a body of tort caselaw<br />
43 that stood against this approach, reliance on the <strong>Contracts</strong> (Rights of Third Parties) Act 1999 was<br />
more soundly based. After citing section 1, where the third party is either a member of a class or within a<br />
particular description, Master Bragge said:<br />
―it is well arguable that the Act applies on the basis that if Mr Crowson is not a party to a<br />
contract (a third party) he can enforce a term of the contract because that is one which confers<br />
a benefit on him, namely insurance as a director. Further he would be a member of a class or<br />
answers to a particular description within section 1(3). 44<br />
G<br />
Variation or cancellation of the Third Party Right?<br />
9.30 The 2008 Privity Report addresses the question whether third party rights, once they are<br />
contained in a contract, should be fixed and immutable, or like most contractual terms, be capable of<br />
being varied or terminated by mutual agreement: the Report sets out the general position thus:<br />
―Contracting parties are generally free to modify or alter the terms of a contract by mutual<br />
agreement. However, if that contract is enforceable by a third party, any such modification of<br />
the contract could have an impact on the rights of the third party. If the contracting parties had<br />
an unlimited power to vary the contract, the third party‘s rights would be relatively meaningless;<br />
as these rights could be changed by the mutual agreement of the contracting parties at any<br />
time. However, if the contracting parties could never agree to vary the terms of the contract it<br />
could be commercially inconvenient and restrict the contracting parties‘ freedom of contract. It<br />
is thus important to strike a balance between the interests of the contracting parties to vary the<br />
contract and the interest of the third party in securing the promised benefit. 45<br />
9.31 The <strong>Commission</strong>, in the 2008 Report, recommended that if a third party assents to the<br />
contract, by word or conduct, the contracting parties should not be free to cancel or vary the contract<br />
once either contracting party is aware of third party assent. 46 However, the parties are to be free to<br />
qualify these third party rights by way of an express term in the contract giving the contracting parties the<br />
right to vary or terminate the contract.<br />
9.32 While the <strong>Commission</strong> has no reason to change views on this issue, an exploration as to<br />
whether there are circumstances in which the consensual variation or termination of an insurance<br />
contract should be prohibited or made the subject of a judicial determination, eg when the third party<br />
beneficiary is likely to be seriously prejudiced through the exercise of any variation or termination right<br />
held by the contracting parties, would be desirable. At the level of principle, one may well agree with<br />
41<br />
42<br />
43<br />
44<br />
45<br />
46<br />
[1992] 1 Lloyd‘s Rep 7.<br />
[1980] Ch 297.<br />
Verderame v Commercial Union Assurance Co Plc [2000] Lloyd‘s Rep PN 557; Texas Homecare Ltd v Royal<br />
Bank of Canada Co (Jersey) Ltd [1996] CLC 776.<br />
[2010] Lloyd‘s Rep IR 441 at 443. On privity in the context of group policies see Re Harris [1939] 1 DLR 495.<br />
2008 Report, para 3.28.<br />
2008 Report, para 3.41-2.<br />
188
Professor Merkin‘s view 47 that there is nothing to suggest that insurance contracts should be treated any<br />
differently to other contracts, but, in practice, the <strong>Commission</strong> is concerned that in certain kinds of<br />
contract the freedom of the parties to renegotiate a contract are subject to commercial or other restraints<br />
or factors that make an individualised bargaining model inappropriate. The 2008 Report itself recognised<br />
that employment contracts involving a number of potential third party beneficiaries may present difficulties<br />
in relation to assenting to the contract. 48<br />
9.33 Specific issues may arise in the case of Group <strong>Insurance</strong> cover that is negotiated between an<br />
employer and an insurer, perhaps either or both parties being represented by a broker. If contracting out<br />
is permitted, that is, the parties are able to expressly stipulate that the contract is not to be enforceable by<br />
a third party in his or her right, the benefits of this reform will be negated. Similarly, if the contract<br />
provides for variation or termination rights in any third party rights may be short lived or diluted somewhat.<br />
The view that an employer may enjoy the right to terminate or vary insurance benefits which are<br />
essentially part of the employee‘s remuneration package, as a matter of private law, appears to be out of<br />
kilter with general principles of employment law 49 and it may well be that additional difficulties may<br />
present themselves should a trade union be involved in representing members. Could a trade union<br />
afford the necessary assent; as the assent provision stands in the draft Bill appended to the 2008 Report<br />
the answer would be in the negative as a union would not be ―another such third party.‖ Similarly issues<br />
may arise as to whether a trade union‘s consent could be effective to bind other non-union employees?<br />
H<br />
Third Party Beneficiary – A definition?<br />
9.34 One matter that perhaps needs to be addressed is whether a definition of third party<br />
beneficiary is required. It should be recalled that the Life Assurance Act 1774 contained a requirement<br />
that persons to benefit under the contract had to be named on the policy, this requirement being relaxed<br />
in 1989 in Ireland in respect of group insurance beneficiaries. 50 This question has been considered in<br />
other jurisdictions in the specific context of insurance contracts and a recent Australian proposed change<br />
affords a useful precedent.<br />
9.35 The Australian Treasury Review, and subsequent Bill 51 consider the question whether a<br />
definition of third party beneficiary is necessary. Part 1 of Schedule 1 to the <strong>Insurance</strong> <strong>Contracts</strong><br />
Amendment Bill 2010 defines a third party beneficiary under a contract of insurance as:<br />
―a person who is not a party to the contract but is specified or referred to in the contract,<br />
whether by name or otherwise, as a person to whom the benefit of the insurance cover<br />
provided by the contract extends.‖<br />
9.36 The <strong>Commission</strong> provisionally recommends that a third party beneficiary under a contract of<br />
insurance should be defined in legislation as a person who is not a party to the contract but is specified or<br />
referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the<br />
insurance cover provided by the contract extends.<br />
I<br />
The Australian General <strong>Insurance</strong> Provision as a Model?<br />
9.37 Following on from the ALRC recommendations on general insurance law reform, the 1984<br />
<strong>Insurance</strong> <strong>Contracts</strong> Actprovides, in section 48, the following provision, the marginal note being<br />
―Entitlement of named persons to claim.‖ Section 48 provides:<br />
47<br />
48<br />
49<br />
50<br />
51<br />
Merkin, <strong>Reform</strong>ing <strong>Insurance</strong> <strong>Law</strong>: is there a case for Reverse Transportation? (2006) paragraphs 8.49 to<br />
8.51.<br />
2008 Report, paras 3.39 to 3.42.<br />
Generally requiring consensual variation or alteration of a contract.<br />
<strong>Insurance</strong> Act 1989, section 26.<br />
<strong>Insurance</strong> <strong>Contracts</strong> Amendment Bill 2010.<br />
189
(1) ―Where a person who is not party to a contract of general insurance is specified or<br />
referred to in the contract, whether by name or otherwise, as a person to whom the<br />
insurance cover provided by the contract extends, that person has a right to recover the<br />
amount of the person‘s loss from the insurer in accordance with the contract<br />
notwithstanding that the person is not a party to the contract.<br />
(2) Subject to the contract, a person who has such a right:<br />
(a) has, in relation to the person‘s claim, the same obligations to the insurer as the<br />
person would have if the person were the insured; and<br />
(b) may discharge the insured‘s obligations in relation to the loss.<br />
(3) The insurer has the same defences to an action under this section as the insurer would<br />
have in an action by the insured. 52 ‖<br />
9.38 Section 48(1) states that the third party entitlement is determined by the contract. Section<br />
48(2) subjects the third party to the same obligations as those imposed on the insured such as observing<br />
the duty of utmost good faith and giving the insurer notice on any loss, such notice being effective in<br />
discharging the insurer‘s obligations under the contract. Section 48(3) makes the same defences as<br />
would have operated against the insured available to the insurer as against the third party.<br />
9.39 Professor Merkin points out 53 that section 48, unlike the 1999 legislation, cannot be the subject<br />
of contracting out and he states that because section 48 has been loosely drafted, it has produced a<br />
significant amount of litigation. However, Professor Merkin, after noting that the 1999 legislation in<br />
England and Wales has proved ineffective because policies in virtually all cases exclude the 1999 Act,<br />
goes on to remark that ―the <strong>Law</strong> <strong>Commission</strong>s will plainly not contemplate adopting a similar [measure to<br />
section 48] given that the English 1999 Act is a far clearer piece of legislation.‖ 54<br />
9.40 In the <strong>Commission</strong>‘s view the choice presented by the English 1999 legislation and section 48<br />
of the 1984 legislation is rather an unhappy one. The general English model threatens to be ineffective<br />
by virtue of a contracting out provision while the specific Australian insurance precedent may be too<br />
inflexible and uncertain. In the final analysis the <strong>Commission</strong> believes that the solution to general privity<br />
problems in insurance law lie in the general privity reform proposal in our 2008 Report. The <strong>Commission</strong><br />
cannot see, in principle, why insurance contracts should be treated any differently to other contracts and<br />
the <strong>Commission</strong> believes that the 2008 Report contains a balanced solution to difficult questions of law<br />
and social policy.<br />
9.41 The <strong>Commission</strong> provisionally recommends that, in the context of third party rights in insurance<br />
contracts, it would, in general, be sufficient to protect such rights if the Oireachtas enacted legislation<br />
based on the draft Contract <strong>Law</strong> (Privity of Contract and Third Party Rights) Bill in the <strong>Commission</strong>‟s 2008<br />
Report on Privity of Contract and Third Party Rights. In addition, the <strong>Commission</strong> invites submissions as<br />
to whether additional specific provisions should be enacted in the context of the operation of insurance<br />
contracts in specific settings for example, in insolvency, on the death of an insured person and during the<br />
completion of a contract for the conveyance of land.<br />
J The Australian Treasury Review and Section 48<br />
9.42 Section 48(1) of the 1984 Australian legislation is currently under review in order to clarify the<br />
rights of a third party beneficiary. Schedule 6 of the <strong>Insurance</strong> <strong>Contracts</strong> Amendment Bill 2010 proposes<br />
to amend section 48(1) so as to read:<br />
52<br />
53<br />
54<br />
While section 48 deals with general insurance separate provision has been made in respect of ordinary life<br />
policies and policies connected to retirement savings account.<br />
Merkin, In <strong>Reform</strong>ing <strong>Insurance</strong> Contract <strong>Law</strong>: Is there a case for reverse transportation? (2006)<br />
Para 8.49.<br />
190
―A third party beneficiary under a contract of general insurance 55 has a right to recover from the<br />
insurer, in accordance with the contract, the amount of any loss suffered by the third party<br />
beneficiary even though the third party beneficiary is not a party to the contract.‖<br />
9.43 As previously stated, section 48 is not capable of being excluded by contract. The Australian<br />
approach, under both the 1982 Report and the 1984 Act, approximated the rights of non contracting<br />
parties to those of the insured. Schedule 6 of the 2010 Bill seeks to carry this process further by allowing<br />
the third party beneficiary to enjoy rights to information from the insurer on a par with rights currently<br />
enjoyed by the insured. This should be seen in the context of the proposed amendments to section 13 of<br />
the 1984 Act. It is proposed 56 that the post contractual duty of good faith is to be extended to third party<br />
beneficiaries vis-a-vis the processing of claims, that failure to comply with the duty is to be regarded as a<br />
breach of the Act, thus triggering a new power in the financial regulator to bring a representative action in<br />
cases of systemic failure. 57 There is a case to be made for providing for greater information rights in<br />
isolation from these questions of wider enforcement powers. For present purposes however, the<br />
extension of section 48 of the 1984 Act, so as to become applicable to third party beneficiaries, is<br />
intended to dissuade an insurance company from dilatory processing of claims where payment is to<br />
benefit a person other than the insured. Adjustments to section 48(2)(a) and 48(3) also copper-fasten the<br />
rights of the third party beneficiary with those of the insured, as well as exposing the third party<br />
beneficiary to whatever defences would have been available if the claim had been brought by the insured.<br />
In the Treasury Review and the discussion of third party rights issues it was said that, because the 1984<br />
Act did not provide a comprehensive answer to third party rights issues by extending all rights an<br />
obligations of insureds under the 1984 Act to specified third party beneficiaries, uncertainly was<br />
engendered which ―ultimately leads to higher risk premiums being charged in relation to the affected<br />
policies and also results in outcomes that may be anomalous or inconsistent.‖ 58 Rather than going down<br />
the path of extending all of the provisions in the 1984 Act to third party beneficiaries the Treasury Review<br />
took a via media between total approximation of rights and doing nothing. The Review concluded that<br />
extension of all rights to third parties might resolve issues of third party uncertainty whilst adding<br />
significant administrative costs in the form of third party notice requirements.<br />
9.44 The preferred option was summarised thus:<br />
This option would treat specified third party beneficiaries as insureds under the <strong>Insurance</strong><br />
<strong>Contracts</strong> Act only for the purposes of:<br />
subrogation, in that the insurer would be able to substitute for the third party<br />
beneficiary in an action against a third party who is liable for a loss that has been<br />
paid by the insurer;<br />
the duty of utmost good faith (but not pre-contractually); and<br />
circumstances where <strong>Insurance</strong> <strong>Contracts</strong> Act allows an insured to request the<br />
insurer provide them with particular information by way of written notice. 59<br />
K<br />
The Australian <strong>Insurance</strong> <strong>Contracts</strong> Amendment Bill 2010 – Breach of the Duty of Good<br />
Faith and Third Parties<br />
9.45 Following upon a protracted process of review, a number of changes to the <strong>Insurance</strong><br />
<strong>Contracts</strong> Act 1984 have been suggested in order to, inter alia, enhance the rights of third party<br />
beneficiaries.<br />
55<br />
56<br />
57<br />
58<br />
59<br />
Effectively non life insurance. Part 2 of Schedule 6 applies to general insurance: similar adjustments for life<br />
insurance are made in Part 3 of Schedule 6.<br />
Part 1(4) of Schedule.<br />
Proposed section 14A.<br />
Regulation Impact Statement to <strong>Insurance</strong> <strong>Contracts</strong> Amendment Bill 2010, para 3.144.<br />
Regulation Impact Statement to <strong>Insurance</strong> <strong>Contracts</strong> Amendment Bill 2010, para 3.149.<br />
191
9.46 The privity doctrine confines the duty of utmost good faith to contracting parties.<br />
Notwithstanding this, the current position in English law indicates that damages for breach of this duty by<br />
an insurer does not entitle the insured to damages for any loss suffered as a result of this breach of<br />
contract – Banque Financiere v Westgate <strong>Insurance</strong> Co. 60 Ipso facto, where there is no duty, as is<br />
arguably the case in relation to strangers to the contract, there can be no breach of a duty. The pattern<br />
set in Australian litigation is to build upon section 13 of the <strong>Insurance</strong> <strong>Contracts</strong> Act 1984, which creates a<br />
post formation duty of utmost good faith, breach of the duty being actionable in damages. In Ireland and<br />
England and Wales, the law in relation to the post contractual duty of utmost good faith is less fully<br />
developed than elsewhere, save in respect of the fact that the England and Wales 1999 statutory privity<br />
reforms may suggest that there are third party rights of a contractual nature, when the contracting parties<br />
so desire. But the question whether a third party may have an effective remedy to enforce a promise may<br />
become a more controversial question should the (contractual) duty become available to third parties or<br />
independently actionable in tort or under statute. Irish law is silent on post contractual good faith as a<br />
general principle.<br />
9.47 The Australian 1984 legislation, by recognising the duty of utmost good faith as an implied term<br />
in the contract of insurance, clearly limits the implied term to the contractual context within which it<br />
operates. However, the proposal to extend the duty of utmost good faith to third parties, by way of an<br />
amendment to section 13 does not mean that a full range of contractual remedies will become available<br />
to third parties. The proposed amendment to section 13 will allow the regulator to intervene on behalf of<br />
third party beneficiaries and while the Bill does seek to improve information access rights under section<br />
41 of the 1984 Act for third parties, there will be no expansion of damages remedies for third party<br />
beneficiaries. The <strong>Commission</strong> are of the view that it is best to maintain the present position whereby<br />
third parties cannot rely on a duty of utmost good faith. If, in contrast, the duty to act in utmost good faith<br />
is actionable in tort, as it is in the United States, a number of consequences follow hard upon. For<br />
example, if the tort is to be regarded as being closely related to fraud or deceit, there would be an<br />
argument for applying not only the very generous tort rules in relation to foreseeability but also the rules<br />
applicable to remoteness of damage for fraudulent misrepresentation. The <strong>Law</strong> <strong>Commission</strong>s, in their<br />
Good Faith Issues Paper 6, point to the fact that the vast majority of US States allow for the award of<br />
punitive damages often even in third party claims cases. 61<br />
9.48 If a decision is taken to extend the duty of utmost good faith, as an implied term, for instance,<br />
into the contract of insurance, the implied term would presumable only be broken as between the policy<br />
holder and the insurer. This appears to be the existing situation in Australia. Post contract breach of the<br />
duty by an insurer is most likely to arise in relation to bad faith processing of a claim or a failure to warn or<br />
advise an insured. The <strong>Commission</strong> do not recommend that third party beneficiaries should be able to<br />
invoke good faith obligations which should be owed only to contracting parties.<br />
9.49 It should be noted that Irish law, by way of the provisions in sections 7 and 8 of the Married<br />
Women‟s Status Act 1957 already permits recovery of damages in a limited range of circumstances that<br />
can include consumer insurance contracts within a family context and that the proposed reforms in the<br />
2008 Report will provide a mechanism for third party recovery.<br />
9.50 Should a decision be taken against allowing a third party to be able to invoke a contractual duty<br />
of utmost good faith, by way of an exception to the privity of contract doctrine, the question may arise<br />
whether such a duty should arise in tort. While the <strong>Commission</strong> does not wish to inhibit the development<br />
of the law of negligence, or indeed any other tortious liability on a case by case basis, there appears to be<br />
no strong argument favouring the expansion of tort law. The <strong>Law</strong> <strong>Commission</strong>s, in their Issues Paper 6,<br />
were against developing the duty of good faith by holding it to be actionable as a separate tort or deficit<br />
60<br />
61<br />
[1990] 2 All ER 947. See Eggers Picken and Foss, Good Faith in <strong>Insurance</strong> <strong>Contracts</strong> (2010) (3rd Edition)<br />
paras 16.95 to 16.135.<br />
Damages for Late Payment (March 2010), Chapter 7. Third party claims cases involve actions brought<br />
directly against the insurer of persons other than the insured, often on state laws involving strict liability, bad<br />
faith, or negligence: see (2004) Tort Trial and <strong>Insurance</strong> Practice <strong>Law</strong> Journal 39(4); (2010) Tort Trial and<br />
<strong>Insurance</strong> Practice <strong>Law</strong> Journal 46(2).<br />
192
ecause this would leave open an insurer to a more extended and unpredictable liability. 62 Most of the<br />
responses to the Consultation exercise (and most were form lawyers and insurers) were against the<br />
award of tort damages being available for breach of good faith. This must be seen in the light of the<br />
decision of the <strong>Law</strong> <strong>Commission</strong>s to oppose the development of a duty of utmost good faith as either an<br />
implied term or a tort, 63 favouring instead a statutory ―stand alone‖ duty subject to legislative restrictions.<br />
9.51 Arguments of this kind provide a compelling case for declining to extend third party rights into<br />
good faith obligations under insurable contract law. The <strong>Commission</strong> believes that section 8 of the<br />
Married Women‟s Status Act 1957 already provides members of a family who are envisaged as<br />
beneficiaries under a contract of insurance with statutory rights to compensation in specific circumstances<br />
and the <strong>Commission</strong> believes that the extension of a post contractual duty of good faith to third party<br />
beneficiaries is unwarranted.<br />
10<br />
62<br />
63<br />
Ibid.<br />
Para 9.28 of Issues Paper 6 with possible increases in premiums. Summary of Responses to Issues Paper 6:<br />
Damages for Late Payment and the Insurers‟ Duty of Good Faith, para 4.8.<br />
193
CHAPTER 10<br />
REMEDIES<br />
A<br />
Introduction<br />
10.01 In this chapter the <strong>Commission</strong> will seek to develop and contextualise a number of issues<br />
relating to remedies that have been examined elsewhere in the Consulation Paper. The shift away from<br />
providing that the primary remedy for non-disclosure and misrepresentation should be avoidance of the<br />
claim for example requires an examination of the proportionality remedy. The <strong>Commission</strong> will also<br />
consider whether the Sale of Goods and Supply of Services Act 1980, when viewed in the context of the<br />
proposed reforms found in the UK Consumer <strong>Insurance</strong> (Disclosure and Representations) Bill 2011<br />
provides guidance on the way forward. The <strong>Commission</strong> will also examine some of the issues addressed<br />
in Chapter 4 on whether the misrepresentation provisions in Part V of the Sale of Goods and Supply of<br />
Services Act 1980 can be modified in respect of proposer misrepresentation and non-disclosure. In<br />
relation to compensatory provisions for late payment of a claim the <strong>Commission</strong> will review the existing<br />
law with a view to improving the current position in Irish law. Outside the area of compensation the<br />
<strong>Commission</strong> will consider responding to some isolated contract rules which have been widely criticised<br />
such as the subrogation rights of employers arising out of employee breaches of duty. The <strong>Commission</strong><br />
will also consider whether legislative changes to the rescission/avoidance relief in relation to an insured‘s<br />
failure to observe a condition precedent would improve Irish law.<br />
B<br />
(a)<br />
Compensatory Remedies – Proportionality<br />
The Australian Position<br />
10.02 The Australian 1982 Report (after providing a cogent critique of avoidance or rescission as<br />
being a disproportionate remedy for a proposer‘s misrepresentation or non-disclosure) concluded that<br />
―the substitution of a right to damages for the existing right of avoidance would provide an adequate<br />
deterrent to misrepresentation and non-disclosure. It would also ensure that insurers were entitled to<br />
adequate compensation for loss suffered as a result of breach of the insured‘s duties. Disproportionate<br />
burdens would no longer be placed on the insured. Even so, an important problem arises: the method by<br />
which damages should be assessed‖. 1<br />
10.03 In the discussion that followed, the ALRC broadly agreed with the <strong>Law</strong> <strong>Commission</strong> which in its<br />
1980 Report saw a proportionality test as having a degree of attractiveness when the area of insurance is<br />
statistically based, the premium being calculated by way of a set tariff. In other cases where the premium<br />
is set on a ―once off‖ basis, or calculated by reference to qualitative factors (health) or moral hazard<br />
considerations, the process is more difficult. Proportionality was rejected in favour of an across the board<br />
adoption of the common law damages measure applied in cases of fraudulent misrepresentation, which<br />
the ALRC characterised as being ―the amount which would place the other party in the position he would<br />
have been in had the misrepresentation not been made.‖ 2 This tortious measure was seen by the ALRC<br />
as providing a more accurate application of the restitution in integrum principle, save in cases where the<br />
loss does not arise before the proposer‘s breach becomes known prior to avoidance and the occurrence<br />
of any loss. 3 In a robust defence of the move towards adopting the principle that ―the insurer‘s redress<br />
should depend on the nature and extent of the loss which it has suffered as a result of the insured‘s<br />
1<br />
2<br />
3<br />
ALRC Report No. 20, Para 187.<br />
ALRC Report No. 20, Para 194.<br />
ALRC Report No. 20, Para 187.<br />
195
conduct‖, 4 the ALRC went on to address the evidentiary difficulties while insisting that the interests of<br />
justice required that they should be overcome:<br />
―it is not always easy in retrospect, to determine what the insurer would have done had it<br />
known the true facts. In numerous cases, however, the insurer would be able to establish,<br />
whether from rating guides, from its instructions to its agents or staff or from its prior conduct,<br />
the nature and extent of the loss which it had suffered. It is true that it would sometimes be<br />
difficult to establish how it would have reacted to additional moral, as distinct from statistical,<br />
risks. But difficulties of proof cannot be avoided if a proper balance is to be reached between<br />
the interests of the insurer and those of the insured. It is quite plainly contrary to the true<br />
principle of uberrima fides to impose on the insured a burden which far exceeds the harm<br />
which he has done. The insurer should not be entitled to any redress which exceeds the loss<br />
which it has in fact suffered. That is the basic principle which lies behind the law of damages,<br />
both in contract and in tort.‖ 5<br />
10.04 For general insurance policies, ie policies other than life insurance, the ALRC thus rejected a<br />
strict proportionality approach, noting at the same time that certain life offices had in fact adopted<br />
proportionality in relation to life insurance; written and oral misstatements and non-disclosure that were<br />
innocently made should be remediable in damages calculated on a restitutionary basis. The 1984 Act<br />
provides a right to damages for non-disclosure or misrepresentation (s.28(3)) in cases of general<br />
insurance with a right to avoid the policy being limited to instances of fraud, subject to a judicial discretion<br />
to disregard the avoidance under s.31. For life policies under section 29 a proportionality approach has<br />
been adopted. Professor Rob Merkin, in his Paper, <strong>Reform</strong>ing <strong>Insurance</strong> <strong>Law</strong>: Is there a case for<br />
Reverse Transportation? Points out that the damages provisions in particular have ―generated a mass of<br />
confusing and not particularly logical case-law and has left the courts to develop their own principles on<br />
the assessment of damages.‖ 6 Merkin also refers to the ―illogicality in distinguishing between life and<br />
general insurance, applying proportionality to the former but not to the latter.‖ The availability of damages<br />
calculated on a restitutionary basis, despite the apparent rejection of the proportionality principle by the<br />
ALRC, appears to be the norm in Australia and the 2010 Bill in Australia seeks to align life and general<br />
insurance in significant areas. Australian courts seem to apply proportionality. This is certainly the view<br />
taken of section 28(3) of the <strong>Insurance</strong> <strong>Contracts</strong> Act 1984 by the <strong>Law</strong> <strong>Commission</strong>s who cite that section<br />
as authority for the proposition that ―if the insurer would have demanded an increase in premium and a<br />
claim has arisen, proportionality should be applied. In other words, if the [negligent] misrepresentation or<br />
non-disclosure led to the insurer only paying 50% of the correct premium of the claim...if the insurer would<br />
not have accepted the risk had it known the truth, or if it would have inserted an exception which applies<br />
to the claim, the insurer‘s liability is reduced to nil‖ 7<br />
(b)<br />
The <strong>Law</strong> <strong>Commission</strong>s Consultation Paper<br />
10.05 The <strong>Law</strong> <strong>Commission</strong>s Proposed that the law should provide a compensatory remedy aimed at<br />
putting the insurer in the position it would have been in if the insurer had been aware of the true facts<br />
specifically:<br />
(1) If the insurer would have excluded a particular type of claim, the insurer need not pay<br />
claims that would fall within the exclusion;<br />
(2) Where the insurer would have imposed a warranty or excess, the claim will be treated as<br />
being subject to that warranty or excess;<br />
(3) Where the insurer would have charged more, the payment on the claim to be made is to<br />
be reduced proportionately;<br />
4<br />
5<br />
6<br />
7<br />
ALRC Report No. 20, Para 194<br />
Ibid.<br />
Para. 4354-4.60.<br />
<strong>Law</strong> <strong>Commission</strong>s 2007 Consultation Paper, para. 4.157.<br />
196
(4) Where the risk would have been declined altogether, the policy may be avoided,<br />
premiums returned and the claim refused.<br />
10.06 The December 2009 <strong>Law</strong> <strong>Commission</strong>s Report, 8 which of course is limited to<br />
misrepresentations in consumer <strong>Insurance</strong>, endorses the earlier approach in relation to compensatory<br />
remedies for careless misrepresentations. In the December 2009 Report the <strong>Law</strong> <strong>Commission</strong>s stressed<br />
that the changes are compensatory, directed at calculating the insurer‘s loss. The <strong>Law</strong> <strong>Commission</strong>s also<br />
pointed out that some three quarters of respondents favoured a proportionality approach although ―a<br />
minority disagreed with the proposal on the basis that the problems would be too great‖. The <strong>Law</strong><br />
<strong>Commission</strong>s recommendation was that:<br />
―where the consumer has made a careless misrepresentation, the insurer is entitled to a<br />
compensatory remedy as follows:<br />
(1) If the insurer would not have entered into the contract on any terms, the insurer may<br />
avoid the contract (but must return the premiums);<br />
(2) If the insurer would have entered into the contract on different terms (apart from those<br />
relating to the premium), the contract is treated as if it were made on those terms;<br />
(3) In addition, if the insurer would have charged a higher premium, the insurer may reduce<br />
the amount of the claim proportionately.‖ 9<br />
10.07 This approach avoids the somewhat unnecessary set of distinctions that have bedevilled<br />
Australian case-law under the 1984 Act and subsequent legislative changes while retaining a focus on<br />
restitutionary principles. The 2009 Report, and the Consumer <strong>Insurance</strong> (Disclosure and<br />
Representations) Bill 2011 provides valuable insights into how a restitutionary/proportionality range of<br />
remedies can opertate.<br />
(2) The Irish Experience<br />
10.08 It is arguable that the proportionality approach to assessing an insurer‘s loss strikes some<br />
judges as a sensible and fair one, and there is one striking illustration of this in O‟Callaghan v Irish<br />
National <strong>Insurance</strong>, 10 a policy of industrial insurance. The correct age of the life to be insured was not<br />
inserted into the proposal form; the form contained a basis of contract clause. When the correct facts<br />
came to light the company sought to avoid the policy but Circuit Judge Kenny felt that he was free to<br />
disregard the answer given as long as the claim was limited to the amount the insurer would have<br />
provided cover for had the true facts been disclosed. The Divisional Court held that the Circuit Judge had<br />
no such power and granted the insurer a declaration that the policies were void. While the Óireachtas<br />
provided some relaxation of this strict rule 11 in the <strong>Insurance</strong> Act 1936 in relation to industrial insurance,<br />
this is one legislative exception that proves the rule. However, the Financial Services Ombudsman has<br />
on several occasions permitted recovery of a percentage of an insured amount, notwithstanding that the<br />
insurer had some basis in law for avoiding the policy. In the December 2008 Summary of Decisions the<br />
Ombudsman ruled on refusal to honour a holiday insurance cancellation policy on the grounds of nondisclosure<br />
of a pre-existing condition. The Ombudsman ruled that<br />
―While accepting that the company had justifiable grounds for refusing the claim on the<br />
grounds of non-disclosure nevertheless the Ombudsman taking into account all the<br />
circumstances of the case and bearing in mind what was fair and reasonable, found the<br />
complainant was entitled to 50% of the benefit payable under the policy in respect of the<br />
cancellation of the policy.‖<br />
8<br />
9<br />
10<br />
11<br />
Consumber <strong>Insurance</strong> <strong>Law</strong>: Pre Contract and Misrepresentation (December 2009).<br />
Ibid, para. 6.62.<br />
(1934) 68 ILTR 248.<br />
<strong>Insurance</strong> Act 1936, s.64(2).<br />
197
10.09 The earlier decisions of the <strong>Insurance</strong> Ombudsman 12 reflect a more principled approach to<br />
looking for solutions based upon proportionality. In case study 49 of the Digest the insurer declined to<br />
pay a death benefit claim for non-disclosure of a pre-existing medical condition; on investigating the<br />
complaint however the <strong>Insurance</strong> Ombudsman noted that there were inconsistencies in the<br />
documentation which led to the conclusion that non-disclosure was innocent, ie ―the company had<br />
produced insufficient evidence to justify a finding of fraud or deception on behalf of the deceased, nor had<br />
it proved reckless or negligent non-disclosure. Accordingly, I decided to apply the principle of<br />
proportionality to the complainant‘s claim.‖ Even though the company gave no evidence of what the<br />
loading would have been, had the time facts been known, the <strong>Insurance</strong> Ombudsman said she was<br />
satisfied that a loading of 50% of the sum insured was appropriate. Similarly, in some instances where<br />
the policy itself referred to payment of proportionate sums, the <strong>Insurance</strong> Ombudsman on several<br />
occasions ruled that the company should be required to exercise this discretion rather than decline to<br />
meet the claim. In case study 149 of the digest, for example, an earnings protection policy had to be met<br />
by the insurer, the benefit being calculated on the basis of the insured‘s reduced earnings in the relevant<br />
period and payment of a proportionate amount of the benefit.<br />
10.10 The <strong>Law</strong> <strong>Commission</strong>s in the December 2009 Report, 13 provide some helpful insights into<br />
proportionality remedies in respect of three scenarios involving variations in cover, excesses and<br />
premiums. The examples given suggest that when the analysis starts from a position where the<br />
proposer‘s degree of fault is the primary question, and the probable reaction of the insurer to the true<br />
facts can be assessed, a workable accommodation of proportionality and avoidance remedies can be<br />
established. Again, it must be emphasised that the current analysis and the <strong>Commission</strong>‘s provisional<br />
recommendations do not seek to in any way abridge an insurer‘s right to avoid the policy where a<br />
fraudulent misrepresentation has been made by the proposer.<br />
10.11 The <strong>Commission</strong> questions whether the debate on whether proportionality should be adopted<br />
as the relevant means of calculating and awarding the insurer the loss arising out of non-disclosure, a<br />
misrepresentation or other breach of contractual duty is an entirely artificial one. Certainly at this distance<br />
the <strong>Law</strong> <strong>Commission</strong>‘s initial 1980 objections appear to be directed as much at the proposed European<br />
Directive itself as at the substantive arguments against a proportionality principle: the <strong>Commission</strong> does<br />
concede that the <strong>Law</strong> <strong>Commission</strong> was correct in pointing to the fact that in the proposed Directive the<br />
remedy being contended for by the European <strong>Commission</strong> was not well defined, but this of itself does not<br />
appear to the <strong>Commission</strong> to be dispositive. 14 The <strong>Law</strong> <strong>Commission</strong>‘s objection that proportionality would<br />
require the specific insurer to underwrite a risk that the insurer might well have decided to decline, or<br />
subject to limiting provisions, is also in the view of the <strong>Commission</strong>, beside the point. In this situation it<br />
would be appropriate to allow the insurer to prove that, because the proposal would have been declined<br />
altogether, or made the subject of a tailored limitation or exclusion, damages should be reduced by up to<br />
100%.<br />
10.12 Situations of this kind are commonplace in many damages assessments: the licensing<br />
measure of compensation following upon the infringement of intellectual property rights requires a court to<br />
value the worth of a patent or design as between a willing licensor and a willing licensee, but this<br />
measure may and often is inappropriate to other forms of exploitation, and in cases where the rights<br />
owner would not have granted a licence in any circumstances. The debate over proportionality seems to<br />
ignore the possibility that this approach to the assessment of quantum might well be appropriate in the<br />
vast majority of insurance contracts that involve consumers, ―small businesses‖, telephone and internet<br />
insurance, and so on. In insurance that is broker arranged or bespoke, or addresses unusual or ―one off‖<br />
risks it may be that difficulties of proof are exaggerated. This was certainly the view of the <strong>Law</strong><br />
<strong>Commission</strong>s in 2007 and 2009. It will certainly be the case that premiums and exclusions may differ<br />
quite markedly and that the assessment will not always by easy. Even in Manor Park Homebuilders Ltd v<br />
AIG Europe (Ireland) Ltd 15 the policy provided by AIG was limited cover as distinct from the earlier ―all<br />
12<br />
13<br />
14<br />
15<br />
Decisions of the <strong>Insurance</strong> Ombudsman, 1992-1998 (Digest).<br />
Consumer <strong>Insurance</strong> <strong>Law</strong>: Pre Contract Deisclosure and Misrepresentation.<br />
<strong>Law</strong> Com No. 104, <strong>Insurance</strong> <strong>Law</strong>: Non Disclosure and Breach of Warranty, para. 415.<br />
[2009] 1 ILRM 190.<br />
198
isks‖ policy provided by Royal and Sun Alliance. Three other companies declined to quote in that case<br />
so it will often be factually difficult to value cover and speculate on what an insurer would have done.<br />
10.13 But starting from the perspective that a court ―should be alert, energetic and if necessary<br />
ingenious to assess damages where it is satisfied that a significant injury has flowed from breach,‖ 16 the<br />
process of estimating the insurer‘s loss may be no different or more difficult to any other hypothetical<br />
exercise. The explosion in cases where judges are required to estimate the money value of a loss of<br />
chance affords a very telling example. 17 Judicial experience in the process of discounting damages in<br />
relation to contributory negligence are not entirely dissimilar, despite the <strong>Law</strong> <strong>Commission</strong>‘s protestations<br />
in 1980 to the contrary. 18<br />
10.14 In the <strong>Commission</strong>‘s view the position taken by the <strong>Law</strong> <strong>Commission</strong> in 1980 and the<br />
Australian <strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong> in 1982 is fortified by the assessment made by the <strong>Law</strong><br />
<strong>Commission</strong>s in their 2007 Consultation Paper, where the <strong>Law</strong> <strong>Commission</strong>s concluded that, on the<br />
difficulty in estimating hypothetical premiums:<br />
―We think that experience has shown that the 1980 Report exaggerated the difficulties. As the<br />
National Consumer Council pointed out, the <strong>Insurance</strong> Ombudsman Bureau applied<br />
proportionality, and its current successor, the FOS also does so. We found cases in FOS files<br />
where they had no trouble in dealing with an exclusion that would have been added, or in<br />
working out the effect on a premium of an additional motoring conviction. The approach<br />
appears to have gained acceptance from the industry, and we note that it also has the support<br />
of the British <strong>Insurance</strong> <strong>Law</strong> Association. 19<br />
10.15 As the <strong>Commission</strong> has provisionally recommended the abolition of the right to avoid or rescind<br />
a contract of insurance for an innocent non-disclosure that falls outside the reformulated duty of<br />
disclosure, as well as in instances of innocent misrepresentation, the question whether a remedy in<br />
damages should be available in either case does not arise. The insurer will have to meet any claim in full.<br />
The guiding principle should be to ask what this particular insurer would have done if the full facts were<br />
disclosed or known. If this cannot be determined for whatever reason then it might be possible to<br />
estimate the remedy by reference to general common law principles, as informed by the <strong>Law</strong><br />
<strong>Commission</strong>‘s view that the French Courts often determine a fair deduction as a matter of fact or<br />
discretion, rather than arithmetical precision. 20 Alternatively, the court may resort to some objective<br />
standard such as the prudent insurer who actively operates in the insurance field in question. The<br />
<strong>Commission</strong> do not think that in this residual area, where proportionality will be based on what the actual<br />
insurer would have done, any inflexible mechanism directing how this adjudication is to be made is<br />
possible.<br />
10.16 Where however the insurer would have declined the proposal or excluded the loss that has<br />
arisen, the <strong>Law</strong> <strong>Commission</strong>s raise the question whether the courts should have a discretion to allow the<br />
insurer to recover a proportion of the claim where the proposer‘s error was a minor one, and other<br />
insurers would have accepted the risk, at a higher premium. 21 This situation raises an important question<br />
for the <strong>Commission</strong>‘s provisional recommendations and an affirmative answer would provide a convenient<br />
way of forestalling a number of difficult questions such as policing the boundary between innocent and<br />
negligent conduct as well as possible arguments about the applicability of contributory negligence. On<br />
the other hand, such a recommendation would have the effect of weakening the important policy objective<br />
that stands at the core of our proposals for reform, namely, that the law should require proposers to act<br />
16<br />
17<br />
18<br />
19<br />
20<br />
21<br />
Finlay P in Grafton Court v Wadson Sales High Court, 17 February 1975; ESL Consulting Ltd v Verizon<br />
(Ireland) Ltd [2008] IEHC 369.<br />
Philp v Ryan [2004] IESC 105; Lett & Co v Wexford BC [2007] IEHC 195.<br />
<strong>Law</strong> Com No. 104, para. 4. 106.<br />
Consultation Paper, Para. 4.162.<br />
<strong>Law</strong> Com No.104 para. 4.7.<br />
Consultation Paper, para. 4.178.<br />
199
carefully and responsibly when seeking to enter into a contract of insurance. The <strong>Commission</strong> would<br />
welcome views on whether this situation should be addressed in the forthcoming Report on <strong>Insurance</strong><br />
<strong>Contracts</strong> but the <strong>Commission</strong>, at this time, would not favour creation of such discretionary powers.<br />
10.17 Perhaps the most problematical question that arises is the scope of the <strong>Commission</strong>‘s<br />
recommendations relating to the creation of a compensatory remedy. Should the shift away from<br />
avoidance and rescission as the insurer‘s primary remedy to damages (save in instances of fraud) apply<br />
across the board? This is the situation in Australia. In the United Kingdom the <strong>Law</strong> <strong>Commission</strong>s<br />
certainly felt that this should be the case, as a matter of principle, but the joint Consultation Paper<br />
stopped short of recommending the demise of the avoidance remedy in business insurance as well as in<br />
consumer insurance cases where the proposer has been negligent. In the 2009 Report this disctinction<br />
between fraudulent and negligent non disclosure and misrepresentation was maintained; the Consumer<br />
<strong>Insurance</strong> (Disclosure and Representations) Bill 2011 provides for different remedies for an insurer<br />
following upon deliberate or reckless misrepresentations and careless misrepresentations. In the first<br />
situation the insurer may avoid the contract and refuse all claims, retaining the premium except to the<br />
extent that it would be unfair to the consumer to retain them. In cases of careless misrepesentations the<br />
remedies to the insurer are based upon what the insurer would have done had the duty not to make a<br />
misrepresentation been observed. If the insurer would not have entered the contract on any terms, the<br />
claim may be declined and the premiums returned. If the insured would have added terms (eg<br />
disclaimers) the contract should be read as if it contained those terms. If a higher premium would have<br />
been charged ―the insurer may reduce proportionately the amount to be paid on a claim. After taking the<br />
position that ―avoidance in every case of negligence over-compensates the insurer for the loss it has<br />
suffered‖ 22 the Joint Consultation Paper addressed three main arguments against restricting the<br />
availability of the avoidance remedy in business insurance.<br />
(1) it is difficult to prove the insured acted dishonestly;<br />
(2) the difficulty of sharing what the insurer would have done (creating a field day for expert<br />
witnesses);<br />
(3) the need to maintain strong incentives for proposers to act carefully.<br />
10.18 The <strong>Law</strong> <strong>Commission</strong>s did not take a view on this, inviting submissions both on the question<br />
whether the law should distinguish between dishonest and negligent misrepresentation/non-disclosure<br />
and whether, for negligent conduct,<br />
―should the law provide a remedy which (unless the parties have agreed otherwise) aims to put<br />
the insurer into the position it would have been had it known the true circumstances?‖ 23<br />
10.19 In the United Kingdom the <strong>Law</strong> <strong>Commission</strong>s propose to return to business insurance contract<br />
issues late in 2011. The signs are that if the <strong>Law</strong> <strong>Commission</strong>s recommend anything at all, the changes<br />
proposed will be default rules that can be avoided by agreement, subject to the possibility that some small<br />
businesses, who do not arrange insurance through a broker, may be treated as if they were a consumer<br />
proposer. The <strong>Commission</strong> think that this is a reasonable inference to be drawn from the 2007<br />
Consultation Paper.<br />
10.20 The <strong>Commission</strong> concludes that the law should continue to distinguish between dishonest and<br />
negligent conduct and that dishonesty should continue to allow the insurer to refuse to meet the claim and<br />
retain the premiums. In cases of negligence the position to be adopted should be based upon what the<br />
insurer would have done had the misrepresentation not been made. The <strong>Commission</strong> conclude that this<br />
will provide the insurer with a remedy in damages in accordance with the principle that the insurer is to be<br />
put in the position the insurer would have been in had the insurer known the true circumstances: in cases<br />
of non-disclosure where the proposer negligently breaches the reformulated duty of disclosure, and in<br />
22<br />
23<br />
Consultation Paper, para. 5.88. Soyer, in ―Are the <strong>Law</strong> <strong>Commission</strong>s on the Right Track?‖ [2008] JBL 385 and<br />
―<strong>Reform</strong>ing Pre-Contractual Information Duties in Business <strong>Insurance</strong> <strong>Contracts</strong> – One <strong>Reform</strong> Too Many?‖<br />
[2009] JBL 15 argues that the <strong>Law</strong> <strong>Commission</strong>s restrictions on the availability of avoidance for negligent<br />
breach go too far.<br />
Consultation Paper, para.5.107.<br />
200
elation to negligent misrepresentation, the insurer should only avoid the policy or rescind the contract<br />
where the insurer can show that the risk would not have been accepted or that an exclusion applicable to<br />
the risk that materialised would have been imposed.<br />
10.21 The <strong>Commission</strong> provisionally recommends that avoidance of the insurance policy should no<br />
longer be the main remedy, and that in cases of non-disclosure and misrepresentation the principal<br />
remedy should be one of damages in proportion to the failure by the insured.<br />
10.22 The <strong>Commission</strong> provisionally recommends that the insurer should be able to avoid the policy<br />
prospectively upon discovery of a negligent non-disclosure or misrepresentation even if the insurer is<br />
bound to meet any claims submitted by the insured. Should the insurer decide to exercise this right the<br />
avoidance will be effective upon giving the insured written notice of this decision.<br />
C<br />
(a)<br />
Compensatory Remedies – Building on the 1980 Act<br />
Damages for Innocent misrepresentation?<br />
10.23 For historical reasons the common law has not afforded the victims of an innocent<br />
misrepresentation any rights to seek damages: the primary remedy has been a right to rescind the<br />
contract. Case-law in the twentieth century began to recognise both the injustice and the<br />
inappropriateness of such a position by broadening promises into contractual terms, and by creating new<br />
tortious actions for negligent misstatements and breach of a fiduciary duty. Section 2(1) of the<br />
Misrepresentation Act 1967, the template for section 45(1) of the Sale of Goods and Supply of Services<br />
Act 1980, provided a misrepresentee with a statutory right to damages;<br />
―(1) Where a person has entered into a contract after a misrepresentation has been made to<br />
him by another party thereto and as a result thereof has suffered loss, then, if the person<br />
making the misrepresentation would be liable to damages in respect thereof had the<br />
misrepresentation been made fraudulently, that person shall be so liable notwithstanding that<br />
the misrepresentation was not made fraudulently, unless he proves that he had reasonable<br />
ground to believe and did believe up to the time the contract was made that the facts<br />
represented were true.‖<br />
10.24 In theory this cause of action could be useful in relation to both insurers and insureds, insofar<br />
as a contract of insurance is within the statute as being a contract for services (see s.43 of the 1980<br />
statute). But, as it will be shown, there are some obstacles preventing either party from using these<br />
provisions and judicial opinion stands against creating a right to damages for breach of a contract of<br />
insurance.<br />
10.25 The <strong>Law</strong> <strong>Commission</strong>s noted that the English courts have taken a policy decision in relation to<br />
the scope of the s.2(1) action for damages following upon a non-fraudulent misrepresentation but it is the<br />
<strong>Commission</strong>‘s view that the impact of Highland <strong>Insurance</strong> 24 can be overestimated: that case concerned a<br />
contract of reinsurance effected as between sophisticated and experienced commercial entities and<br />
Steyn J‘s observations must be seen in this context. Nevertheless, s.2(1) does appear to set the bar at a<br />
high level, if Banque Financiere v Westgate <strong>Insurance</strong> Co. 25 is to be followed in Ireland. In the Court of<br />
Appeal Slade LJ observed that if the plaintiff is to recover damages under s.2(1), ―the ingredients of a<br />
fraudulent misrepresentation have to be present save for the ingredient of dishonesty.‖ 26 Because the<br />
plaintiff could not show that a misrepresentation had been made with the intention that it be acted upon<br />
by the other party, an essential element in the tort of a deceit was missing. More importantly perhaps,<br />
Slade LJ held that s.2(1) could not be used where a misrepresentation in the strict sense had not been<br />
made. If the defendant failed to observe a duty of disclosure that stopped short of a misrepresentation,<br />
s.2(1) is of no avail: after referring to the use of ―misrepresentation...made‖ in s.2(1) of the 1967 Act,<br />
Slade LJ said the expression:<br />
24<br />
25<br />
26<br />
Highland <strong>Insurance</strong> Co v Continental <strong>Insurance</strong> Co [1987] 1 Lloyds‘ Rep. 109.<br />
[1989] 2 All ER 952.<br />
Ibid, p.1003, decision affirmed by the House of Lords [1990] 2 All ER 947.<br />
201
―would, in our judgment, on the ordinary meaning of words be inapt to refer to a<br />
misrepresentation which had not been made in fact but was (at most) merely deemed by the<br />
common law to have been made. If it had been the intention of the legislature that a mere<br />
failure to discharge the duty of disclosure in the case of a contract uberrimae fidei would fall to<br />
be treated as the ‗making‘ of a representation within the meaning of the 1967 Act, we are of the<br />
opinion that the legislature would have said so.‖ 27<br />
10.26 Rix LJ in HIH <strong>Insurance</strong> also stated that breach of the duty of good faith leads to only to an<br />
avoidance remedy. 28<br />
(b)<br />
The discretion to award damages in lieu of rescission<br />
10.27 Section 2(2) of the Misrepresentation Act 1967, which was the legislative template for section<br />
45(2) of the Sale of Goods and Supply of Services Act 1980, provides an additional statutory relief by way<br />
of damages following a pre-contractual misrepresentation:<br />
―(2) Where a person has entered into a contract after a misrepresentation has been made to<br />
him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation,<br />
to rescind the contract, then, if it is claimed in any proceedings arising out of the contract that<br />
the contract ought to be or has been rescinded, the court may declare the contract subsisting<br />
and award damages in lieu of rescission, if of opinion that it would be equitable to do so,<br />
having regard to the nature of the misrepresentation and the loss that would be caused by it if<br />
the contract were upheld, as well as to the loss that rescission would cause to the other party.‖<br />
10.28 Paragraphs in the Tenth Report of the <strong>Law</strong> <strong>Reform</strong> Committee 29 explain the thinking that<br />
prompted this legislative change. The <strong>Law</strong> <strong>Reform</strong> Committee clearly felt that it was necessary to restrict<br />
the representee‘s right to rescind the contract on the basis that damages would be a more proportionate<br />
remedy: after referring to the ―drastic‖ remedy of rescission and proposals in the Report to make this<br />
remedy more widely available than hithertofore, the Committee recommended that damages should be<br />
available to a court as an alternative to rescission:<br />
―Unless the court‘s power to grant rescission is made more elastic than it is at present, the<br />
court will not be able to take account of the relative importance or unimportance of the facts<br />
which have been misrepresented. A car might be returned to the vendor because of a<br />
misrepresentation about the mileage done since the engine was last overhauled, or a transfer<br />
of shares rescinded on account of an incorrect statement about the right to receive the current<br />
dividend. In some cases the result could be as harsh on the representor as the absence of a<br />
right to rescind under the present law can be on the representee.‖ 30<br />
10.29 Section 2(2) of the Misrepresentation Act 1967 has also been adopted in some Australian<br />
jurisdictions and in Hong Kong. What is surprising about the provision is just how little the provision has<br />
been used by the judiciary. Some of the reasons for this underutilisation may be traced back to the rather<br />
tentative nature of the 1967 reform itself. There is no right to damages in lieu: the <strong>Law</strong> <strong>Reform</strong><br />
Committee recommended a judicial discretion be enacted:<br />
―we recommend that wherever the court has power to order rescission it should, as an<br />
alternative, have a discretionary power to award damages if it is satisfied that these would<br />
afford adequate compensation to the plaintiff, having regard to the nature of the representation<br />
and the fact that the injury suffered by the plaintiff is small compared with what rescission<br />
would involve.‖<br />
10.30 Section 2(2) clearly has no application to cases of fraudulent misrepresentation. It is also<br />
arguable that in cases where an insurer is seeking to avoid a contract of insurance for innocent<br />
misrepresentation or non-disclosure, rescission is not the remedy that the insurer seeks to invoke. The<br />
27<br />
28<br />
29<br />
30<br />
[1989] 2 All ER 952 at 1004.<br />
HIH Casualty and General <strong>Insurance</strong> Ltd v Chase Manhattan Bank [2001] 2 Lloyd‘s Rep. 483.<br />
(July 1962). Cmnd. 1872, Innocent Misrepresentation.<br />
Ibid. Paragraph 11.<br />
202
insurer is seeking to avoid the contract ab initio and it is arguable that the decision by the insurer to avoid<br />
may pre-empt any judicial discretion; Professor Malcolm Clarke has made this argument and even though<br />
it has been rejected by other authorities there is no clear judicial decision on the point. Furthermore, the<br />
relevance of the section to cases where an insurer seeks to avoid the contract for a breach of a<br />
representation of fact that has been converted into a contractual term – for example, the insurances<br />
proposal form or the policy makes a statement of fact a warranty – has not been established by case-law,<br />
but there does not seem to be any judicial discussion on such an obvious point. The learned authors of<br />
Chitty on <strong>Contracts</strong> observe that while the point is an open one this is not thought to be the result of s.2(2)<br />
and that ―in any event it is very unlikely that the court would exercise its jurisdiction to prevent an insurer<br />
rescinding on the ground of misrepresentation by the insured.‖ With respect, this seems to be a curious<br />
argument. If fraud is removed from the equation, there is no reason why a court could not decide that an<br />
innocent misrepresentation might be best remedied through an award of damages, regardless of whether<br />
the statement is or is not a contractual term. The same may also hold true in cases where the<br />
representation was made negligently. The section 2(2) discretion appears to be rather inelastic if<br />
observations of the kind made by Chitty represent the law.<br />
10.31 It might be possible to build upon section 45(2) of the 1980 Act by clarifying that the judicial<br />
discretion does indeed apply to instances of ab initio avoidance and that the discretion applies even to<br />
misrepresentations that are integrated into the contract as warranties of existing or future fact. It is<br />
arguable that such a revision of s.45(2) would inject into this provision some of the vitality that the authors<br />
of the provision had in mind when this reform was initially contemplated in England and Wales.<br />
(c) Damages – measure of loss under section 45(2)<br />
10.32 As shown above, section 2(2) of the Misrepresentation Act 1967 (UK) and section 45(2) of the<br />
Sale of Goods and Services Act 1980 have not been used to any extent and there are no authoritative<br />
decisions on the measure of loss that a court would award should the discretion be exercised.<br />
10.33 In the 1980 Report the <strong>Law</strong> <strong>Commission</strong> did not address the relationship between the 1967 Act<br />
and insurance law. The <strong>Law</strong> <strong>Commission</strong>s, in the 2007 Consultation Paper appear to have discounted<br />
the s.2(2) remedy on the ground that case-law is against applying the provision to commercial insurance<br />
and because the measure of damages ―is obscure‖ 31 . The <strong>Commission</strong> is forced to conclude that the<br />
uncertain nature of section 45 of the 1980 Act makes it an unsatisfactory basis upon which to build a<br />
compensatory remedy. Nevertheless, it may be asked whether these objections to judicial use of section<br />
45(2) are necessarily valid, especially in the light of the Consumer <strong>Insurance</strong> (Disclosure and<br />
Representations) Bill 2011. Schedule 1 of the Bill provides a set of rules that should guide any judge<br />
when deciding whether to exercise any discretion available in respect of section 45(2) of the 1980 Act and<br />
the relevant provisions are these (in abridged form):<br />
10.34 The insurer‘s remedies are based on what it would have done if the proposer had complied<br />
with the duty. If the insurer would not have entered into the insurance contract on any terms, the insurer<br />
may avoid the contract and refuse all claims, but must return the premiums paid. If the insurer would<br />
have entered into the insurance contract, but on different terms (exluding terms relating to the premium),<br />
the contract is to be treated as if it had been entered into on those different terms if the insurer so<br />
requires. In addition, if the insurer would have entered into the insurance contract (whether the terms<br />
relating to matters other than the premium would have been the same or different), but would have<br />
charged a higher premium, the insurer may reduce proportionately the amount to be paid on a claim.<br />
―Reduce proportionately‖ means that the insurer would need to pay on the claim only X% of what it would<br />
otherwise have been under an obligation to pay under the terms of the contract.<br />
D<br />
Compensatory Remedies – damages for late payment of a claim<br />
10.35 One of the most controversial aspects of insurance contract law is not addressed by the <strong>Law</strong><br />
<strong>Commission</strong> in their 2007 Consultation Paper, possibly because the question resonates across the law<br />
relating to compensatory reliefs in commercial law. Should the insurer be required to pay compensatory<br />
damages to an insured when the failure by the insurer to settle a claim has caused consequential loss?<br />
31 Consultation Paper 2007, para.2.14.<br />
203
There are a number of aspects to this question. The core issues are addressed in relation to the duty of<br />
good faith and whether any breach of duty on the part of an insurer should attract an award of damages<br />
in respect of consequential loss. Two provisions in the Principles of European Contract <strong>Law</strong> (PEICL)<br />
provide a convenient benchmark:<br />
Article 6:103<br />
Acceptance of Claims<br />
(1) The insurer shall take all reasonable steps to settle a claim promptly.<br />
(2) Unless the insurer rejects a claim or defers acceptance of a claim by written notice giving<br />
reasons for its decision within one month after receipt of the relevant documents and<br />
other information, the claim shall be deemed to have been accepted.<br />
Article 6:104 (3) provides that payment of insurance money, whether relating to the whole or part of an as<br />
yet unquantified claim, shall be made no later than one week after acceptance or qualification. The<br />
PEICL continue:<br />
(a)<br />
Article 6:105<br />
Late Performance<br />
(1) If insurance money is not paid in accordance with Article 6:104, the claimant shall be<br />
entitled to interest on that sum from the time when payment was due to the time of<br />
payment and at the rate applied by the European Central Bank to is most recent main<br />
refinancing operation carried out before the first calendar day of the half-year in question,<br />
plus seven percentage points.<br />
(2) The claimant shall be entitled to recover damages for any additional loss caused by late<br />
payment of the insurance money.<br />
The position in English law<br />
10.36 English law clearly supports the proposition that there can be no cause of action in respect of<br />
the late payment or non payment of monies due on a policy of insurance. As the time for assessing the<br />
loss occasioned by the event that triggers the claim is the time of that event, and no later date, the fact<br />
that the costs of reinstatement, for example, have risen or fallen is irrelevant. The decision of the House<br />
of Lords in President of India v Lips Maritime Corporation is authority for the proposition that ―there is no<br />
such thing as a cause of action in damages for late payment of damages.‖<br />
10.37 This bizarre situation is due to the view that, at common law a contract of indemnity gives rise<br />
to an action for unliquidated damages arising from the failure by the indemnifiers to prevent the<br />
indemnified person from suffering damage, the common law also supporting the view that the cause of<br />
action does not arise until the indemnified person can show actual loss. It is the specified loss that is<br />
recoverable: The Fanti: 32 The <strong>Law</strong> <strong>Commission</strong>s, in Issues Paper 6, Damages for Late Payment 33 chart<br />
the rather unhappy line of authority, whilst noting that the Scottish courts have rejected the view that the<br />
obligation on an insurer is to hold harmless the insured, not pay damages, preferring instead to hold that<br />
the insurer has an obligation to pay a valid claim once it has had the opportunity to investigate the validity<br />
of the claim: Strachan v The Scottish Boatowner‟s Mutual <strong>Insurance</strong> Corporation. 34 This is also the<br />
position taken in Australia, Canada and the United States. 35 Unfortunately the scant authority available in<br />
Ireland inclines towards the English position. 36<br />
32<br />
33<br />
34<br />
35<br />
36<br />
[1991] 2 AC 1.<br />
March 2010.<br />
[2001] Scots CS 138.<br />
See Appendix A of Issues Paper 6.<br />
Kerry Tree (Technology) Ltd v Sun Alliance and London <strong>Insurance</strong> [2001] IEHC 144.<br />
204
10.38 The decision of Hirst J in The Italia Express (No.2) 37 applied the reasoning in Lips (a case on<br />
demurrage) to a case involving payments of insurance withheld whilst investigating suspected fraud. In<br />
Sprung v Royal <strong>Insurance</strong> 38 the Court of Appeal rejected the argument that an insured had a claim in<br />
damages arising out of the insurer‘s failure to pay out promptly on a policy, the insurer, if in breach of<br />
contract, being answerable only to the insured by way of interest. Professor Merkin summarises English<br />
law as having adopted the position that ―an assured who is paid late, and who in the meantime loses his<br />
business for want of funds to reinstate his premises, has no additional remedy against his insurers.‖ 39<br />
While this is generally the accepted position, there are some decisions that provide some prospect of<br />
change. Even Sprung itself reflects a degree of unease with a rule of law that displaces the general<br />
application of Hadley v Baxendale. Evans LJ in Sprung said that while the Italian Express states that late<br />
or non payment per se is not actionable if, on the other hand:<br />
―the plaintiff is able to show that the defendants have committed some other and separate<br />
breach of contract, and if specifically he can show that the defendants were in breach by failing<br />
to accept liability or to approve of the reinstatement at an early stage, then the recovery of<br />
damages would not be restricted to the discretionary award of interest in the other case.‖ 40<br />
10.39 In Tonkin v UK <strong>Insurance</strong> Ltd 41 Judge Coulson QC approved both the general principle and the<br />
exception sketched out by Evans LJ in Sprung. In Tonkin the plaintiff sought to have damages assessed<br />
by reference to the increased cost of reinstatement work that resulted from the insurer‘s failure to pay out<br />
promptly on the claim, the insurers defending the action by arguing that the insured had failed to provide<br />
proper information to support the claim. While on the facts the insured‘s claim was extremely weak,<br />
Tonkin does open up the possibility of some movement on this point in English law. Rix LJ, in Mandrake<br />
Holdings Ltd v Countywide Assured Group 42 opined that this matter was a matter for review by the House<br />
of Lords but, as the <strong>Law</strong> <strong>Commission</strong>‘s Issues Paper No.6 indicates, the House of Lords did not grant<br />
leave to appeal to the House. Issues Paper No.6 points up the extent to which the English approach is<br />
somewhat isolated and in need of reform.<br />
10.40 In Ireland, the only real guidance on this point is somewhat oblique. Kerry Tree (Technology)<br />
Ltd v Sun Alliance and London <strong>Insurance</strong> 43 concerned a claim brought against an insurer involving<br />
allegations that the insurer had caused a business to fail when imposing unreasonable duties to mitigate<br />
loss before setting an insurance claim. The insurers put forward the argument that Sprung is authority for<br />
the proposition that a claim for damages for late payment of damages is not a claim know to the law and<br />
Ms Justice Carroll affirmed that such a proposition is part of Irish law.<br />
10.41 The <strong>Commission</strong> would support the view that Italia Express and Sprung should not be followed<br />
and that the law needs to be changed so as to reflect mainstream reasoning on remoteness of damage in<br />
contract law as well as emerging principles of restitution. In this context however, the <strong>Commission</strong><br />
suggests that Article 6:103 and 6:105 of the Principles of European Contract <strong>Law</strong> should form a part of<br />
Irish law. 44<br />
10.42 The <strong>Commission</strong> provisionally recommends that any damages awarded to an insured arising<br />
from the insurer‟s failure to comply with the proposed post-contractual duties of the insurer should reflect:<br />
(a) general principles of damages in contract law, namely whether the loss is a reasonably foreseeable<br />
37<br />
38<br />
39<br />
40<br />
41<br />
42<br />
43<br />
44<br />
[1992] 2 Lloyd‘s Rep. 281<br />
[1999] 1 Lloyd‘s Rep. 111.<br />
Merkin, ―<strong>Reform</strong>ing <strong>Insurance</strong> <strong>Law</strong>: is there a case for Reverse Transportation?”, paragraph 8.12<br />
[1999] 1 Lloyd‘s Rep. 111 at 116<br />
[2007] Lloyd‘s Rep IR 283.<br />
[2005] EWCA Civ 840<br />
[2001] IEHC 144.<br />
The <strong>Law</strong> <strong>Commission</strong>s support the view that damages should be recoverable for late payment of a claim and<br />
provide a seven stage test which an insured must satisfiy to successfully claim such damages. See, Joint<br />
Consultation Paper 2011: <strong>Insurance</strong> Contract <strong>Law</strong>: Post Contactual Duties and Other Issues.<br />
205
consequence of the breach of contract (and in particular, damages that are reasonably foreseeable from<br />
a refusal in bad faith to meet a valid claim); and (b) emerging principles of restitution.<br />
10.43 The <strong>Commission</strong> invites submissions as to the period of time within which an insurer should<br />
meet valid claims.<br />
E<br />
Non-Pecuniary Loss and Damages<br />
10.44 If an insured seeks to recover damages for distress, stigma, injured feelings, physical or mental<br />
injury occasioned by the way in which an insurer processes or rejects a claim, and the court finds that the<br />
insured‘s complaint has some validity, an obstacle to recovery may involve principles of remoteness of<br />
damages. In general terms, commercial contracts may be attended by stress, but a plaintiff is unlikely to<br />
recover damages for mental distress created by a commercial contract that is breached by a defendant.<br />
In one recent English case damages for stress and inconvenience occasioned to a ‗do it yourself‘<br />
enthusiast when a flat pack, self assembly suite of wardrobes did not meet the measurements provided<br />
and could not therefore fit into existing furniture units 45 .<br />
10.45 Where however the contract in question has a predominantly non-commercial purpose or no<br />
significant economic dimension to it – holidays, family occasions such as a wedding for instance –<br />
damages for stress and disappointment can be recoverable. Furthermore, if the contract is one in which<br />
the plaintiff can be said to have sought relief from a stressful situation, or contracted for a professional<br />
service aimed at ameliorating some of the unfortunate events that attend human experience, remoteness<br />
of damage principles may not be a bar to recovery. In Hamilton Jones v David & Snape (a firm) 46<br />
Neuberger J awarded damages for mental distress caused by a firm of solicitors who conducted child<br />
custody proceedings carelessly, permitting the children‘s father to take the children outside the jurisdiction<br />
when appropriate procedures existed to prevent this. Holding that the claimant had engaged the firm to<br />
obtain pleasure, relaxation, peace of mind and freedom from molestation, objectives that had not been<br />
met, damages of £25,000 for mental distress were awarded. While there are no Irish decisions that hold<br />
that an essential purpose behind an insurance contract is protecting the insured form foreseeable<br />
disasters, it is submitted that consumer and small business insurance should not be regarded as<br />
exclusively commercial contracts in the strict sense.<br />
10.46 The decision of Quirke J, in a High Court action brought by a Dublin solicitor, John Hennessy,<br />
in respect of injuries occasioned by a fall from a horse when undertaking a riding lesson at Adare Manor<br />
Equestrian Centre, Limerick, demonstrates that there is some room for non-economic loss to be<br />
recoverable when an insurer is the substantive defendant. Mr Hennessy alleged the injuries were the<br />
result of leaving him, as an inexperienced rider, alone and unsupervised. The defendant‘s insurers,<br />
Quirke J observed, according to a press report 47 defended the action by way of ―a most serious allegation<br />
of fraud against Mr Hennessy which was maintained over two full days of evidence. This allegation was<br />
made with disregard for the consequences for his reputation, the judge added.‖ Damages of €45,000<br />
were awarded to compensate Mr Hennessy for his injuries and €30,000 in aggravated damages were<br />
awarded ―to compensate him for the added hurt caused by the defendants ―outrageous conduct‖ and to<br />
deter the defendant and his indemnifiers from similar conduct in the future.‖<br />
10.47 Because of the fact that there are no Irish cases in which the availability of damages for breach<br />
of any duty of good faith has been considered, one must consider how the Marine <strong>Insurance</strong> Act 1906<br />
addresses the issue of an available remedy. Section 17 indicates that the only remedy is avoidance, and<br />
in the leading case of Banque Financiere de la Cite SA v Westgate <strong>Insurance</strong> Co 48 the House of Lords<br />
approved the reasoning of the Court of Appeal; in English law therefore damages of any kind are not<br />
available for breach of the duty of utmost good faith.<br />
45<br />
46<br />
47<br />
48<br />
Artis v MFI [2006] CLY 1013; on the general rule and exceptions see Farley v Skinner [2002] 2 AC 732<br />
[2001] 1 WLR 924. In property insurance see AXA <strong>Insurance</strong> UK v Cunningham Lindsey UK [2007] EWHC<br />
3023 (TCC).<br />
See ―€30,000 awarded to solicitor over fraud accusation made against him‖ Irish Times May 13, 2009.<br />
[1991] 2 AC 249.<br />
206
10.48 The Ontario Court of Appeal, in 702535 Ontario Inc v Tinmouth and others 49 observed that an<br />
insurance contract is one of utmost good faith:<br />
―there is an implied obligation in every insurance contract that the insurer will deal with claims<br />
form its insured in good faith 50 … good faith requires the insurer to act both promptly and fairly<br />
when investigating, assessing and attempting to resolve claims made by its insureds.<br />
The first part of this duty speaks to the timeliness in which a claim is processed by the insurer.<br />
Although an insurer may be responsible to pay interest on a claim paid after delay, delay in<br />
payment may nevertheless operate to the disadvantage of an insured. The insured, having<br />
suffered a loss, will frequently be under financial pressure to settle the claim as soon as<br />
possible in order to redress the situation that underlies the claim. The duty of good faith<br />
obliges the insurer to act with reasonable promptness during each step of the claims process.<br />
Included in this duty is the obligation to pay a claim in a timely manner when there is no<br />
reasonable basis to contest coverage or to withhold payment…. 51<br />
The duty of good faith also requires an insurer to deal with its insured‘s claim fairly. The duty<br />
to act fairly applies both to the manner in which the insurer investigates and assesses the claim<br />
and to the decision whether or not to pay the claim. In making a decision whether to refuse a<br />
claim from its insured, an insurer must assess the merits of the claim in a balanced and<br />
reasonable manner. It must not deny coverage or delay payment in order to take advantage of<br />
the insured‘s economic vulnerability or to gain bargaining leverage in negotiating a settlement.<br />
A decision by an insurer to refuse payment should be based on a reasonable interpretation of<br />
its obligations under the policy.‖ 52<br />
10.49 These Canadian cases distinguish damages for breach as being independent of damages<br />
payable in respect of the underlying claims. Aggravated and punative damages are also possible. In<br />
contrast to the English position, the Canadian and Australian courts have been clearer on both the nature<br />
of the post contractual duty placed on the isurer either via a contractual implied term (as in Canada), and<br />
by virtue of statute law (as in Australia). These cases clearly envisage the award of damages from breach<br />
of the duty of good faith, in an appropriate case: Fidler v Sun Life Assurance Co of Canada. 53 The<br />
Canadian courts have ruled that it is not necessary to prove an independent actionable wrong for<br />
damages for mental distress to be recoverable, nor need the ―very essence‖ of the bargain to seek to<br />
obtain relief from mental anxiety, for example.<br />
10.50 The High Court of Australia, in CGU Ltd v AMP Financial Planning Pty Ltd 54 had to consider<br />
whether an insurer had breached the section 13 <strong>Insurance</strong> <strong>Contracts</strong> Act 1984 post-contractual duty of<br />
good faith by, belatedly, putting the insured to an obligation to show that claims made and settled, with<br />
the insurer‘s apparent approval, were claims in respect of which liability would have been made out. The<br />
case is a complex one in which much of the evidence concerned the conduct of the trial and the<br />
reasoning of the Full Court of the Federal Court (which itself involved a 2:1 majority decision), but there<br />
was agreement in the High Court of Australia that it is not correct to argue that absence of good faith is<br />
limited to cases of dishonesty. Gleeson CJ and Crennan J wrote:<br />
49<br />
50<br />
51<br />
52<br />
53<br />
54<br />
(2000) 184 DLR (4th) 687.<br />
Citing Whiten v Pilot <strong>Insurance</strong> Co. Ontario Court of Appeal decision [1999] (Can LII 3051), see later the<br />
decision of the S.CC. at [2002] 1 SCR 595.<br />
Citing Bullock v Trafalgar <strong>Insurance</strong> Co of Canada [1996] O.J. No. 2566; Labelle v Guardian <strong>Insurance</strong> Co<br />
[1989] 37 CCLI 274; Jauvin v L‟Ami Michel Automobile Canada (1986) 57 O.R. (2d) 528.<br />
Ibid; see also Maschke Estate v Gleeson (1986) 54 OR (2d) 753; Finlay v Trimac Corp [2008] Can LII 16191;<br />
Veno v United General <strong>Insurance</strong> Corporation (2008) 330 NBR (2d) 237.<br />
[2006] 2 SCR3; McQueen v Echelon General <strong>Insurance</strong> Co [2009] Can LII 50865. Privity of contract may be<br />
required – Mirjagic v State Farm Mutual Automobile <strong>Insurance</strong> Co [2009] Can LII 44415.<br />
[2007] HCA 36: see also (2007) 235 C.LR 1.<br />
207
―The classic example of an insured‘s obligation of utmost good faith is a requirement of full<br />
disclosure to an insurer, that is to say, a requirement to pay regard to the legitimate interests of<br />
the insurer. Conversely, an insurer‘s statutory obligation to act with utmost good faith may<br />
require an insurer to act, consistently with commercial standards of decency and fairness, with<br />
due regard to the interests of the insured. Such an obligation may well affect the conduct of an<br />
insurer in making a timely response to a claim for indemnity. 55<br />
10.51 Callinan and Heydon JJ agreed, drawing an analogy between the reciprocal duty of good faith<br />
and the ―clean hands‖ doctrine that underpins the availability of equitable reliefs, ―observing that the<br />
doctrine was, like the maxim that ―he who seeks equity must to equity‖ 56 In his dissenting judgment, Kirby<br />
J, wrote that the absence of honesty was a universal feature of section 13 duty; following ealier case-law<br />
Kirby J favoured the adoption of a test of whether a party was guilty of ―dishonest, capricious or<br />
unreasonable conduct.‖ 57<br />
10.52 The <strong>Commission</strong> note that in Issues Paper 6 the <strong>Law</strong> <strong>Commission</strong>s have suggested that<br />
damages for breach of the duty of utmost good faith should be available. However, damages for distress<br />
and disappointment do not generally feature in the Issues Paper (there is a limited discussion at<br />
paragraphs 5.43 to 5.48) and English courts suggest that where awards are possible the award should be<br />
―restrained and modest‖ 58 although the decision in Farley v Skinner from which this standard is taken is<br />
not always appropriate. In contrast, in Ireland, the Financial Services Ombudsman has taken a different<br />
view in some instances.<br />
In one case, where non disclosure avoided a life policy of €20,000 the Ombudsman awarded<br />
compensation of €5,000 to mark the fact that the insurer‘s own sales guidelines has not been<br />
followed by the company representative.<br />
In a case of high pressure sales practices deployed to sell an inappropriate product, the insurer<br />
had returned all premiums when discovering how company representatives had acted. The<br />
Ombudsman awarded compensation of €1.500 ―for the distress caused‖ to the vulnerable<br />
insured.<br />
Maladministration of a high value Whole of the Life policy led to an award of €50,000 in lieu of an<br />
offer of €15,000 offered by the insurer to mark the ―great inconvenience‖ and ―loss of trust‖<br />
caused.<br />
A compensatory award of €8,000 was ordered, partly to reflect the fact that the company had<br />
refused to pay the claim ―without adhering to its own policy requirements‖.<br />
Refusal to repatriate the remains of a deceased insured under a travel policy based on<br />
(unsatisfactory) allegations that death occasioned by alcohol. Compensation of €500 for distress<br />
caused to the family was awarded.<br />
Reductions in maternity cover protection effected under the guise of an ―upgrade‖ were ruled<br />
impermissible with the insured receiving a compensatory payment of €2,000.<br />
Compensation of €4,000 awarded to a man who made claims on a loan protection policy that<br />
became operative upon becoming unemployed ―by way of compensation for the wholly<br />
inadequate and unprofessional level of service provided to him and the degree of inconvenience<br />
caused‖.<br />
Following upon the death of his wife the insured had wrongly been told on four occasions that<br />
death benefit cover would result in a payment of €130,000. The Ombudsman ordered a goodwill<br />
payment of €7,500 ―in recognition of the distress caused‖.<br />
55<br />
56<br />
57<br />
58<br />
Para. 16 of the Judgment.<br />
Para. 257 of the Judgment.<br />
Para. 131 of the judgment, following Owen J in Kelly v New Zealand <strong>Insurance</strong> Co Ltd (1996) 130 FLR 97 at<br />
p.111; Speno Rail Maintenance Australia Pty Ltd v Metals and Minerals <strong>Insurance</strong> [2009] WASCA 31<br />
Paragraph 5.47.<br />
208
(a)<br />
An insurer cancelled a motor insurance policy by telephone call when the policy itself required to<br />
to be done in writing. Compensation of €800 ordered for ―inconvenience and confusion‖ caused.<br />
An insured suffered injuries while on a skiing holiday in Austria. Delays in processing payments<br />
on a holiday insurance policy led the Austrian health provider to threaten legal action for recovery<br />
of the outstanding fees. Compensation of €200 ordered for ―stress and inconvenience caused‖<br />
Aggravated Damages and the 2000 Report<br />
10.53 In the Report Aggravated, Exemplary and Restitutionary Damages 59 the <strong>Commission</strong> drew<br />
attention to the distinction between exemplary damages and aggravated damages. While the courts<br />
utilise exemplary damages so as to punish a defendant and deter the defendant and others from<br />
embarking on similar outrageous conduct in the future, 60 aggravated damages are regarded as being<br />
compensatory. However, the conduct of the defendant in acting in blatant disregard of the reasonable<br />
expectations of the plaintiff may of course be seen as a factor that could deepen the sense of hurt and<br />
distress felt by the plaintiff and the Commisison observed that while some Irish courts have identified<br />
aggravated damages as compensatory, some judges have referred to the conduct of the defendant in<br />
ways ―which sit uneasily with a compensatory definition‖. 61 This terminological confusion led the<br />
<strong>Commission</strong> to recommend a legislative measure defining aggravated damages thus:<br />
―Aggravated damages are damages to compensate a plaintiff for added hurt, distress or insult<br />
caused by the manner in which the defendant committed the wrong giving rise to the plaintiff‘s<br />
claim, or by the defendant‘s conduct subsequent to the wrong including the conduct of legal<br />
proceedings.‖<br />
10.54 It is perhaps suprising that the <strong>Commission</strong> did not recommend that aggravated damages<br />
should be available in breach of contract cases: at paragraph 5:26 the <strong>Commission</strong> recommended that<br />
―aggravated damages should be available for all torts and for breach of constitutional rights.‖ In any<br />
event several post-2000 cases hold that aggravated damages may be awarded so as to mark the way in<br />
which a defendant has breached a contract, occasioning injury to the plaintiff outside any economic test.<br />
10.55 In Dinnegan and Dinnegan v Ryan 62 a publican refused to provide contracted services to a<br />
wedding party occasioning considerable distress and humiliation for the plaintiff bride and groom.<br />
Damages of €6,000 were awarded to each of the plaintiffs. ―Stigma‖ damages within the context of<br />
breaches of duty have been held to be available remedies for employees. 63 There is no doubt that future<br />
case-law will continue to push at the boundaries of the compensatory principle while retaining, as a<br />
general rule, the view that stress and disappointment occasioned by a commercial venture that goes awry<br />
is not to be recoverable in an action for breach of contract.<br />
10.56 The decision of Quirke J in relation to John Hennessy‘s riding accident, unreported but outlined<br />
at paragraph 10.46 above, suggests that Irish <strong>Law</strong> has already provided aggravated damages to an<br />
insured in circumstances when a claim has not been met by a bona fide defence on the part of the<br />
defendant and the defendant‘s insurers. However, that claim may well have been brought in tort only.<br />
Discussion has often focused on the possibility of establishing a distinct tort in relation to good faith as<br />
well as the emergence of an action for breach of an implied term in a contract of insurance, but, within<br />
this context, it is not necessary to go further than the view expressed in the Supreme Court of Canada in<br />
Whiten in which existing damages principles were utilised in contract.<br />
10.57 The <strong>Commission</strong> wishes to emphasise that, in most cases of commercial insurance, the view<br />
expressed by the English Court of Appeal in The Italia Express, denying damages for distress will be<br />
applicable for breach of a commercial contract.<br />
59<br />
60<br />
61<br />
62<br />
63<br />
LRC 60-2000.<br />
Conway v. INTO [1991] 2 IR 305<br />
Paragraph 5.15, citing Finlay CJ in Conway v INTO [1991] 2 IR 305.<br />
[2002] 3 IR 178.<br />
Orr v Zomax Ltd [2004] IEHC 47, McGrath v Trintech [2004] IEHC 342.<br />
209
10.58 However, that case concerned a contract of marine insurance and to extrapolate from that<br />
case a proposition denying aggravated damages to all insureds is quite out of step with later<br />
developments such as Farley v Skinner 64 .<br />
10.59 The definition of aggravated damages in the 2000 Report is a broad one: it reflects the need to<br />
take account of the distress and injury caused to the plaintiff as well as the unacceptable conduct of the<br />
defendant. In the present context the <strong>Commission</strong> considers that the notion of utmost good faith will<br />
provide the court with a relevant benchmark, seen in this context, and in the light of other considerations<br />
set out in the 2000 Report.<br />
10.60 The <strong>Commission</strong> believes that this residual compensatory power will be used sparingly and<br />
only in the most egregious cases.<br />
F<br />
Exemplary Damages and the 2000 Report<br />
10.61 In 2000, the <strong>Commission</strong>, in its Report considered whether exemplary damages should be<br />
extended to cases of breach of contract. While the <strong>Commission</strong> considered that ―an extension of<br />
exemplary damages to contract cases would be at odds with the traditional concept of contract law as<br />
having an exclusively private law character‖, the <strong>Commission</strong> went on to say that the <strong>Commission</strong> ―does<br />
not, however, recommend that exemplary damages for breach of contract should be prohibited by<br />
legislation; rather, any possible development of the law on this matter, should be left to the courts where it<br />
can be judged on a case by case basis. 65<br />
10.62 Subsequent developments in other jurisdictions suggest that there may be an argument for<br />
holding that an insurer who breaches the duty of utmost good faith should, in an appropriate case, be<br />
liable to pay exemplary damages whenever the court considers that a compensatory award will not<br />
punish a defendant for his outrageous conduct and provide a sufficient deterrent to the adoption of a<br />
similar course of conduct in the future.<br />
10.63 In the Canadian courts, damages awards that have been made in favour of an insured for the<br />
insurer‘s breach of the duty of good faith, include non-compensatory elements in the quantum 66 . The<br />
Supreme Court of Canada, in Whiten v Pilot <strong>Insurance</strong> Company 67 upheld a jury award of $1 million in<br />
punitive damages where an insurer adopted an exceptionally reprehensible attitude to an insured‘s claim<br />
under a domestic fire insurance policy, forcing the insured to litigate by making contrived and<br />
unsustainable allegations that the insured had torched her own property. One feature of the case that is<br />
of some importance is the fact that the unfounded allegation of arson had a significant stigmatising effect<br />
on the reputation of the insured within the locality, and the distress that the insured experienced was<br />
significant and protracted; loss of this kind is often characterised as aggravated loss and it is possible to<br />
compensate a plaintiff for this kind of non-economic loss without characterising the exercise as<br />
constituting an award of exemplary damages.<br />
10.64 Nevertheless, the majority of the Supreme Court of Canada, in Whiten, identified a need for<br />
some actionable conduct to be present if exemplary damages are to be awarded. Binnie J indicated that<br />
the situation before the Court was not simply a case of a breach of contract to meet the insurance claim:<br />
breach of the contractual duty of good faith is independent of and in addition to the breach of contractual<br />
duty to pay the loss. However, Binnie J stressed that Whiten was an exceptional case that justified an<br />
exceptional remedy.<br />
64<br />
65<br />
66<br />
67<br />
[2002] 2 AC 732. See generally Swaby and Richards, ―<strong>Insurance</strong> <strong>Reform</strong>s: Rebalancing the Kilter?‖ [2011]<br />
JBL 535.<br />
LRC 60, para. 1.56.<br />
Eg. Fidler v Sun Life Assurance [2006] 2 SCR3; McQueen v Echelon General <strong>Insurance</strong> Co. [2009] Can LII<br />
66152<br />
(2002) 209 DLR (4th) 257; in South Africa Van Niekerk, ―Something must be Done about Insurer Bad Faith‖<br />
(1998) 10 SA Merc LJ 110 bemoaned the lack of judicial activism in South Africa in relation to tardy insurers in<br />
a case where the insured‘s death by cardiac arrest may have been contributed to by the insurance dispute.<br />
210
G<br />
Subrogation – Public Policy Exceptions<br />
10.65 Subrogation is a right that is normally exercised by an insurer who, having paid a loss that has<br />
arisen under a policy executed as between the insurer and an assured, steps into the shoes of the<br />
assured in order to eliminate or reduce the loss in question. The insurer is able to obtain the benefit of<br />
any rights and remedies available to the assured against third parties and may in fact sue any third party<br />
in the assured‘s name.<br />
10.66 In the leading Irish case of Driscoll v Driscoll, 68 O‘Connor MR said that:<br />
―the foundation of the doctrine of subrogation is to be found in the principle that no man should<br />
be paid twice over in compensation for the same loss. The corollary to this is that a contract of<br />
indemnity against loss should not have the effect of preventing the insured from being paid<br />
once in full. I do not think that this can be disputed. 69<br />
10.67 Examples of the first situation outlined above can be found in Irish cases such as<br />
Ballymagauran Co-operative Agricultural and Dairy Society Ltd v The County Councils of Cavan and<br />
Leitrim, 70 and Doyle v Wicklow County Council. 71 In both of these cases actions were brought for<br />
compensation for malicious damage against local authorities. The fact that the applicants had contractual<br />
actions against their insurers, or had actually been paid on the foot of insurance, did not provide a<br />
defence on the malicious injury claim. In Doyle v Wicklow County Council Griffin J, for a unanimous<br />
Supreme Court wrote that:<br />
―it is irrelevant whether the applicant in the present case had insured against the risk of<br />
damage by fire or otherwise, or whether or not he had been paid on foot of his policy of<br />
insurance. If he had already been paid on foot of the policy of insurance he, as the insured,<br />
must account to the insurers for any benefit he receives from his claim for compensation.‖ 72<br />
10.68 Part of the subrogation principle involves a more proactive proposition: ―[t]he insurer is<br />
subrogated to any claim of any character which the assured is entitled to bring in proceedings against a<br />
third party to diminish his loss.‖ 73 While the insurer cannot recover against the wrongdoer in<br />
circumstances where the insured could not have successfully mounted an action, the possibility that the<br />
insured could have theoretically recovered against a wrongdoer may leave open subrogation rights. It<br />
matters not that the insured would not have commenced proceedings for obvious reasons, ie, the<br />
wrongdoer was a family member or an employee, the likelihood that such a person had, or was expected<br />
to have, separate insurance being non-existent.<br />
10.69 In Lister v Romford Ice and Cold Storage Co Ltd 74 an insurer was held entitled to be<br />
subrogated to the right to sue an employee of the insured who had injured a fellow worker in the negligent<br />
carrying out of employment duties. Because the contract of employment did not give the negligent<br />
employee an express or implied right to be indemnified by the employer for the negligent carrying out of<br />
contractual duties, the way was left open for the insurer to utilise subrogation rights without the consent of<br />
the employer – indeed, even if this was contrary to the wishes of the employer, not least because the<br />
insurer can conduct subrogation litigation in the name of the insured.<br />
10.70 There are two situations in which this subrogation right has a public policy dimension.<br />
i) Where the insured and the wrongdoer live together in a family unit (and possibly where those<br />
persons are related or part of a social unit analogous to that of a family)<br />
68<br />
69<br />
70<br />
71<br />
72<br />
73<br />
74<br />
[1918] 1 IR 152.<br />
Ibid at 159<br />
[1915] 49 ILTR 49<br />
[1974] IR 55.<br />
Ibid at p74.<br />
McGillivray, paragraph 22-036.<br />
[1957] AC 555<br />
211
ii)<br />
(i)<br />
Where the insured and the wrongdoer are parties to an employment contract with each other<br />
so as to trigger vicarious liability.<br />
Subrogation – Intra Family Claims<br />
10.71 In the first situation, the 1982 Australian ALRC Report made the following observation:<br />
―It is not appropriate that subrogation be available in circumstances where double indemnity is,<br />
as a practical matter, not in issue and where the liability to be relied upon. The most obvious<br />
cases concern domestic insurance. In the field of householder‘s insurance, for example, cover<br />
is offer extended to members of the insured‘s family living with him in the household. But it is<br />
not extended to members of his family living apart, nor to other close relatives or friends who<br />
might visit him. Suppose an insured makes a claim for damage to furniture caused by a fire<br />
started when a relative of the insured carelessly dropped a lighted match into a wastepaper<br />
basket. Unless the relative carries liability cover, there would normally be no question of the<br />
insured himself seeking to recover damages for his relative‘s negligence. Yet the insurer is<br />
entitled to bring an action against the relative in the insured‘s name‖ 75<br />
10.72 This situation has arisen for consideration in Ireland. In Moynihan v Moynihan 76 the plaintiff, a<br />
two year old child, injured herself whilst visiting the home of her grandmother as a result of what Henchy J<br />
called ―an unforeseeable sequence of fortuities‖. The injuries occurred due to the alleged negligence of<br />
the grandmother and Marie, one of the plaintiff‘s aunts in relation to voluntary acts of supervision. As<br />
such, the plaintiff‘s case tested the boundaries or vicarious liability for it was clear that no employment<br />
relationship existed of any kind. Nevertheless, Walsh J, O‘Higgins CJ concurring, found that the trial<br />
judge was wrong to withdraw the issue of liability from the jury on the basis that the grandmother could<br />
not be vicariously liable, in law, for the gratuitous acts of Marie. Henchy J dissented saying that the<br />
absence of any employment relationship between the defendant and her daughter Marie, ―the<br />
circumstances of the accident do not fit into any of the exceptions to the rule that a principal is not liable<br />
for the negligence of an independent contractor or a gratuitous helper or a delegate who is not a<br />
servant.‖ 77<br />
10.73 One can only speculate on the possibility that the defendant was selected because some<br />
policy of domestic insurance was in place in her name; Marie may have been put in the supervisory role<br />
but possibly was not insured against such an event. Henchy J was clearly aware of such a scenario:<br />
―Much as one might wish that the law would allow this plaintiff to recover damages from some<br />
quarter for the consequences of the unfortunate accident that befell her, the inescapable fact is<br />
that there is a complete absence of authority for the proposition that liability should fall on the<br />
defendant (who was innocent of any causative fault) rather than on Marie whose conduct is<br />
alleged to have been primarily responsible for the accident. I see no justification for stretching<br />
the law so as to make it cover the present claim when, by doing so, the effect would be that<br />
liability in negligence would attach to persons for casual and gratuitous acts of others, as to the<br />
performance of which they would be personally blameless and against the risks of which they<br />
could not reasonably have been expected to be insured. To transfer or extend liability in these<br />
circumstances from the blameworthy person to a blameless person would involve the redress<br />
of one wrong by the creation of another. It would be unfair and oppressive to exact<br />
compensatory damages from a person for an act done on his behalf, especially in the case of<br />
an intrinsically harmless act, if it was done in a negligent manner which he could not<br />
reasonably have foreseen and if—unlike an employer, or a person with a primarily personal<br />
duty of care, or a motor-car owner, or the like—he could not reasonably have been expected to<br />
be insured against the risk of that negligence.‖ 78<br />
75<br />
76<br />
77<br />
78<br />
ALRC Report No 20, paragraph 305.<br />
[1975] IR 192.<br />
[1975] IR 192 at 202.<br />
[1975] IR 192 at 202-3<br />
212
(ii)<br />
Subrogation – Employee Liability<br />
10.74 Lister v Romford Ice and Cold Storage Co Ltd was cited with apparent approval by McCarthy J<br />
in Sinnott v Quinnsworth 79 at least insofar as McCarthy J was considering whether a negligent employee<br />
who injures another employee whilst driving a motor vehicle in the course of employment is entitled to be<br />
indemnified by an employer under section 21(1) of the Civil Liability Act 1961. This question was<br />
answered in the negative. However, in a very different context, that of subrogation rights of two insurers<br />
arising out of the same incident in respect of which two overlapping policies are in place. McCarthy J<br />
clearly viewed the logic of Lister as having unsatisfactory results. In the case of Zurich <strong>Insurance</strong><br />
Company v Shield <strong>Insurance</strong> Company Ltd, 80 a postscript to Sinnott v Quinnsworth itself, McCarthy J<br />
remarked that the negligent driver , Edward Durning, in the view of one of the two insurance would be<br />
personally liable to indemnify one of the insurance companies at least to 50% of the amount in question.<br />
McCarthy J responded by stating that Irish law did not have such an effect:<br />
―Happily, the employees of Quinnsworth, and indeed, any other employees including those of<br />
insurance companies, who drive company cars and give lifts in the course of work to fellow<br />
employees, are not faced with such dire consequences.‖ 81<br />
10.75 It is arguable therefore that Irish law is somewhat ambiguous on the scope of Lister and its<br />
relevance in Irish law. In Sinnott v Quinnsworth McCarthy J cited both the ratio decidendi of the majority<br />
judgment, and the reasoning of the two dissenting Lords in relation to underlying policy, with apparent<br />
approval. 82 These contrasting views, form one outstanding jurist, are understandable when bearing in<br />
mind that McCarthy J was considering a range of distinct issues. The <strong>Commission</strong> will examine how<br />
some other jurisdictions have addressed the issue of public policy limitations on subrogation rights.<br />
(2) Limitations on Subrogation Rights<br />
(a)<br />
The Principles of European <strong>Insurance</strong> Contract <strong>Law</strong><br />
10.76 Article 10:101(3) contains an important provision that addresses these public policy<br />
considerations in a quite sweeping fashion:<br />
―The insurer shall not be entitled to exercise rights of subrogation against a member of the<br />
household of the policyholder or insured, a person in an equivalent social relationship to the<br />
policyholder or insured, or an employee of the policyholder or insured, except when it proves<br />
that the loss was caused by such a person intentionally or recklessly and with knowledge that<br />
the loss would probably result.‖<br />
10.77 The notes to Article 10:101(3) provide the following comments: 83<br />
―National legal systems deal with the issue covered by this paragraph in different ways, but at<br />
least some of them provide for similar restrictions on insurer‘s subrogation rights and there are<br />
equivalent voluntary ones elsewhere. The purpose of these restrictions is to prevent the social<br />
harm that could result from a person appearing to bring a legal action against someone with<br />
whom he or she might be in an extremely close relationship, even if in reality the action is<br />
brought by the insurers. There are sound policy reasons for providing such exclusions. To<br />
take a simple example, it does not seem sound to allow an insurer who has indemnified the<br />
owner of, say, a vase whom it has indemnified, to claim against the owner‘s partner who was<br />
simply careless in causing the vase to fall to the floor and break.<br />
It is clear that such restrictions do not apply when the insurer can prove that the defendant<br />
caused the loss deliberately or recklessly and with knowledge that loss or damage would<br />
probably result....there is no good policy reason to exempt from liability someone who has<br />
79<br />
80<br />
81<br />
82<br />
83<br />
[1984] ILRM 523.<br />
[1988] IR 174.<br />
[1984] ILRM 523.<br />
[1984] ILRM 523 at 537-8.<br />
Page 257.<br />
213
caused loss in such circumstances.<br />
defendant who has been negligent.<br />
On the other hand, the paragraph does protect the<br />
Three categories of persons are protected by Article 10:101 para.3. The restrictions extend to<br />
persons connected with the policyholder and not just with the insured. ―Member of the<br />
household‖ should be understood to mean someone living in the same household as the<br />
policyholder or insured. The second category – those in an equivalent social relationship –<br />
should be construed to cover members of the family of the policyholder or insured who do not<br />
live with the latter and such persons as close friends or neighbours because action against<br />
such persons could lead to a breakdown in relationships. As to the third category, it should<br />
always be clear whether or not a person is an employee of the policyholder or insured.<br />
10.78 In developing the thinking behind some of these national law exceptions, the PEICL authors<br />
stress that the decision to deny an insurer a subrogation right is based upon the fact that the insured<br />
himself ―would have brought no claim and who might take defacto or de jure recourse against the<br />
policyholder or the insured. Another argument is that the insurance is often taken out also in the interest<br />
of those individuals.‖ 84<br />
(b)<br />
―The group of protected persons varies from country to country. It is generally agreed that<br />
close family members such as the insured‘s spouse, children, and parents as well as persons<br />
living with the insured in the same household are protected under the exception clause....In<br />
addition, some statues also include persons employed in the household of the insured.... The<br />
Netherlands adopts the broadest approach extending the protection also to the employer or<br />
employee of the policyholder or insured, or to persons employed with the same employer.<br />
As a general rule, the exception to subrogation does not apply where the third party caused the<br />
insured event intentionally....[In Switzerland] on the other hand, the exemption clause is only<br />
applicable if the third party in question acted with slight negligence or with no fault at all (see<br />
art. 72 para. 3 ICA).‖ 85<br />
The Australian Experience<br />
10.79 The reaction to Lister in Australia has been of considerable interest, demonstrating both a<br />
judicial and a legislative reaction (at both federal and state levels) to the majority decision in Lister. The<br />
position in Australia is a complex one in the sense that the insurance law issue concerns matters of a<br />
federal nature while the vicarious liability situation in employment law has been addressed by the<br />
Australian States.<br />
10.80 In the 1982 Report, the ALRC opined that it is the expectations of employees that:<br />
―the burden of risks attendant upon employment will be borne by the employer. The employer<br />
is expected to insure himself against liability to third parties...exercise, in this context, of an<br />
insurer‘s rights of subrogation is inconsistent with sound practice in the field of industrial<br />
relations.‖ 86<br />
10.81 The ALRC noted that South Australia had reversed Lister New South Wales had at that time<br />
introduced similar legislation, while Tasmania required insurance be taken out by an employer to cover<br />
employees injuring fellow employees. The ALRC recommended that in the context of insurance, the<br />
South Australian approach be adopted.<br />
10.82 The situation in New South Wales is of direct relevance insofar as the Employee‟s Liability<br />
(Indemnification of Employer) Act 1982 closed off all employers‘ rights to recover damages for breach of<br />
contract by an employee, but the statute was silent on concurrent liability in tort. Subsequent litigation<br />
allowed the judiciary to close this gap through a process of interpretation. In McGrath v Fairfield<br />
Municipal Council 87 the High Court of Australia gave amending legislation, the New South Wales<br />
84<br />
85<br />
86<br />
87<br />
Note N7 page 259 PEICL.<br />
Note N8 to N9, pages 259-60 PEICL (references to Articles of various civil codes omitted).<br />
ALRC Report No. 20 paragraph 306.<br />
(1985) 156 CLR 672.<br />
214
Employee‟s Liability (Indemnification of Employer) Act 1982 a broad interpretation so as to allow the<br />
employee to avoid liability in respect of both an indemnity and a contribution as joint tortfeasor (see<br />
section 21(1) of the Irish Civil Liability Act 1961), a unanimous Court observing that:<br />
―It is scarcely to be supposed that the legislature intended to exclude the employer‘s right to<br />
recover in contract but to leave on foot his right to recover contribution from his employer as a<br />
concurrent tortfeasor...[t]he 1982 amendment sprang from a deeply rooted and general<br />
concern with the substance of the problem as it was thought to exist under the law as<br />
expounded in Lister v Romford Ice, namely, the perceived injustice in the employer‘s<br />
entitlement to recoupment whether under s.5(1)(c) or under the contract from an employee<br />
whose fault resulted in the employer becoming liable to a plaintiff.‖ 88<br />
10.83 The critical point of course is the legislative purpose the 1982 NSW legislation. In contrast, the<br />
Supreme Court, in Sinnott v Quinnsworth applied the majority decision in Lister v Romford Ice to a case<br />
where one employee injured another employee in a motor accident that occurred during the course of<br />
employment. The Supreme Court indicated that section 21(1) of the Civil Liability Act 1961 afforded no<br />
right to an indemnity, especially in the case at bar where the driver of a motor vehicle can scarcely be<br />
described as ―innocent‖ when driving negligently. McCarthy J indicated that he saw no merit in awarding<br />
an indemnity in favour of an employee against an employer when the employer ―presumably, employed<br />
him to drive safely‖. 89<br />
10.84 While section 6(1)(c) of the <strong>Law</strong> <strong>Reform</strong> (Married Women and Tortfeasors) Act 1935 was the<br />
legislative template for section 21(1) of the Civil Liability Act 1961, and its predecessor, section 5 of the<br />
Tortfeasors Act 1951, the drafters of the 1961 Act clearly had in mind the desirability of seeking to do<br />
justice in each individual case. Section 21(2) requires a court to award, by way of an amount, what is<br />
―just and equitable having regard to the degree of the contributor‘s fault.‖ Unlike the 1951 Act, the court is<br />
to consider comparative blameworthiness rather than causation: see Connolly v Dundalk UDC 90 and<br />
Keane J in Iarnród Éireann v Ireland. 91 Glanville Williams 92 was extremely critical of the majority decision<br />
in Lister v Romford Ice.<br />
10.85 In the United Kingdom the policy issues raised by the decision in Lister v Romford Ice lead to<br />
the appointment of an Inter Departmental Committee 93 by the Minister for Labour ―to study the<br />
implications of the payments in the case of Lister v Romford Ice and Cold Storage Co Ltd as they might<br />
affect the relations between employers and workers.‖ The Committee noted that numbers of the British<br />
<strong>Insurance</strong> Association had entered into ―a gentleman‘s agreement‖ stating that:<br />
―Employers Liability Insurers agree that they will not institute a claim against the employee of<br />
an insured employer in respect of the death or injury to a fellow employee unless the weight of<br />
evidence clearly indicates (i) collusion, or (ii) wilful misconduct on the part of the employee<br />
against whom a claim is made.‖<br />
10.86 The ALRC indicated that no similar agreement existed in Australia and the ALRC cited judicial<br />
opinion 94 which indicated that the law was in an unsatisfactory state. The <strong>Insurance</strong> <strong>Contracts</strong> Act 1984<br />
contains three related provisions. Section 65 relates to insurers who are liable in respect of an insured<br />
loss where an insured has not or is not reasonably likely to exercise rights of action because of a family or<br />
other personal relationship between the insured and the third party. The section also relates to injuries<br />
caused by a third party who has used a motor vehicle with the express or implied consent of the insured.<br />
Section 66 applies in situations where an insured becomes liable because of conduct by an employee<br />
88<br />
89<br />
90<br />
91<br />
92<br />
93<br />
94<br />
Ibid<br />
[1984] IR 523 at 538.<br />
Supreme Court unreported, November 18 1992.<br />
[1995] 2 ILRM 161 at 197.<br />
Williams, ―Vicarious Liability and Masters Indemnity‖ (1957) 20 MLR 20.<br />
See Gardner (1959) 22 MLR 652.<br />
Marrapodi v Smith-Roberts (1970) 44 ALJ4.<br />
215
occasioning in the course of, or arose out of, his/her employment. Sections 65 and 66 do not displace<br />
subrogation rights if the loss was caused by conduct that was ―serious or wilful misconduct‖.<br />
10.87 In his review of the Australian experience, Professor Rob Menkin did not really comment on<br />
sections 65 and 66 of the 1984 Act, suggesting that these reforms have not proved controversial. 95 .<br />
10.88 Apart from the Federal <strong>Insurance</strong> Statute, there has been some analysis of the issue of<br />
vicarious liability, particularly in relation to the extension of liability in respect of teachers and voluntary<br />
child supervisors. Because this is of relevance to Irish law after Moynihan v Moynihan, the <strong>Commission</strong><br />
will briefly examine the Queensland Report on Vicarious Liability.<br />
(3) The Queensland Report on Vicarious Liability<br />
(a)<br />
Employee Liability<br />
10.89 While the 1984 Legislation addresses the question of Lister v Romford Ice within the context of<br />
insurance contract law, the residual question of how vicarious liability should take account of the potential<br />
conflict of indemnity and contractual principles is a matter of state jurisdiction in Australia. The<br />
Queensland <strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong> in a 1995 Discussion Paper, 96 and a Report, 97 published in 2001,<br />
considered the Lister decision within the context of vicarious liability and a joint tortfeasor‘s exposure to<br />
indemnity or contributions. The Queensland <strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong> saw the Rule in Lister v Romford<br />
Ice as a mechanism whereby an employer who is vicariously liable for the tort of an employee is ―able to<br />
shift the responsibility for paying compensation for the loss or injury resulting from the commission of the<br />
tort to the employee‖. 98 The main objections to retention of Lister v Romford Ice were summarised thus:<br />
―the <strong>Commission</strong> is concerned that the right of an employer to an indemnity from an employee<br />
defeats the effect of vicarious liability in that it results in an employee becoming personally<br />
liable for the amount awarded in damages caused by the employee‘s tortuous conduct during<br />
the course of the employment relationship.<br />
The continuation of the common law principle that an employer who is found to be vicariously<br />
liable can seek an indemnity from a negligent employee is objectionable on other grounds.<br />
These are:<br />
that if the employee only were sued by the plaintiff, he or she might be able to benefit<br />
from any insurance policy held by the employer on behalf of the employee; but if sued<br />
jointly with the employer, the employee could become liable if the insurer exercises its<br />
right of subrogation;<br />
that the existing law is contrary to the promotion of good industrial relations and<br />
harmony by virtue of the fact that employees are exposed to potential litigation by<br />
employers‖<br />
10.90 The Queensland <strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong> rejected the UK ―Gentleman‘s agreement‖ solution<br />
on the ground that it:<br />
―could lead to uncertainty, since it relies on the good faith of insurers. It is also unsatisfactory,<br />
and potentially unfair, in that the agreement relates only to actions brought by insurers (in the<br />
name of an insured employer) against an employee for personal injury caused to a fellow<br />
employee, and does not affect the question of indemnity of an employer by an employee where<br />
an employer is uninsured or where the damage is outside the scope of the employment.‖<br />
10.91 The Queensland <strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong> recommended the statutory abrogation of Lister v<br />
Romford Ice and that:<br />
95<br />
96<br />
97<br />
98<br />
<strong>Reform</strong>ing <strong>Insurance</strong> <strong>Law</strong>: is there a case for reverse transportation? Paragraphs 8.19 to 9.19.<br />
Vicarious Liability (QLRC WP, July 1995).<br />
Vicarious Liability (Report No. 56 December 2001).<br />
Ibid at Chapter 5.2 (a)<br />
216
―an employer should be liable to indemnify an employee in respect of liability incurred for any<br />
tort committed by the employee during the course of, or arising out of, the employment<br />
relationship.‖ 99<br />
10.92 The only circumstance in which an employee should be denied the protection against such a<br />
shield, the Queensland <strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong> recommended, is where the conduct of the employee<br />
amounts to ―serious and wilful misconduct‖. This position mirrors that found in the <strong>Insurance</strong> <strong>Contracts</strong><br />
Act 1984, sections 65 and 66.<br />
(b)<br />
Vicarious Liability of parents, adult supervisors and Teachers<br />
10.93 While in general terms the common law does not impose vicarious liability upon adults who are<br />
charged with supervision or control of a child (largely because of the absence of any employment<br />
relationship or economic interest in most cases) the possibility that an insurance policy may be in<br />
existence has tested the boundaries of vicarious liability to employees and other excepted cases such as<br />
persons driving motor vehicles with the consent of an insured person but there has been no systematic<br />
analysis of this subject. Broadly speaking, the Queensland <strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong> considered the<br />
issues raised by the principles of vicarious liability, agency, and instances where liability could arise as<br />
the result of a duty being non-delegable. In this context the availability of insurance cover was said to be<br />
a relevant consideration in ―considering any statutory extension of the principle of vicarious liability to<br />
relationships between parents and children, teachers and pupils and adult supervisors and charges. 100<br />
10.94 The Queensland <strong>Law</strong> <strong>Reform</strong> <strong>Commission</strong> found that there was insufficient justification, both in<br />
terms of economic efficiency and broader societal goals, to warrant expanding principles of vicarious<br />
liability vis-à-vis parents, adult supervisors and teachers for the torts of children. The 1984 insurance<br />
legislation in Australia does not appear to address this matter in general terms.<br />
(4) Canada – Lister<br />
10.95 There has been no legislative response to Lister in Canada and while some decisions appear<br />
to favour a wide application of liability principles more recent cases suggest otherwise. In Douglas v<br />
Kinger. 101 In this case a 13 year old boy was engaged by the plaintiff to work in and around the plaintiff‘s<br />
cottage doing manual work for $8 per hour. Whilst fuelling the lawn mower the boy struck a match<br />
igniting the fuel vapours and causing destruction of the cottage by fire. The plaintiff sued the boy in tort<br />
and contract. The Ontario Court of Appeal tested the issue of liability by reference to the modified two<br />
stage test endorsed by Canadian courts after Anns v Merton London Borough Council. 102 At the first<br />
stage of the analysis, a search for a duty of care and proximity, the Ontario Court of Appeal held that a<br />
duty of care only arose in cases of employee relationships where expectations representations and<br />
reliance would create such a duty. In the case of an unskilled boy being paid at a low rate of pay no duty<br />
could reasonably be imposed. The second stage in the Anns analysis also favoured the defendant. The<br />
policy considerations that were relevant in deciding whether liability should be imposed – deterrence of<br />
employee negligence is not best achieved by imposing liability save in cases of wilful misconduct or gross<br />
negligence – also made the imposition of liability undesirable. Lang JA cited as one of the factors that<br />
supported a decision to negative liability in this case the fact that:<br />
―I have already noted, a determination that, in the ordinary course, employees are not liable to<br />
indemnify employers for ordinary negligence, accords with practice or legislation in many other<br />
jurisdictions that have already abolished the right of insurers to subrogate against employees<br />
under general liability policies.‖ 103<br />
99<br />
100<br />
101<br />
102<br />
103<br />
Ibid<br />
Chapter 2.4.<br />
(2008) 294 DLR (4 th ) 267.<br />
[1978] AC 728: in the Canadian Courts see Anns, as applied in Kamloops (City of) v Nielson [1984] 2 SCR 2,<br />
at p.10-11.<br />
(2008) 294 DLR (4 th ) 267, para 64. Liability in contract was denied on the basis that the employment contract<br />
was not a beneficial contract of service.<br />
217
10.96 Leave to appeal to the Supreme Court of Canada was refused. 104<br />
(5) <strong>Reform</strong> of Lister in the United Kingdom<br />
10.97 There have not, as yet, been any legislative proposals regarding the public policy exceptions to<br />
the subrogation principle. The January 2006 <strong>Law</strong> <strong>Commission</strong>s Scoping Paper 105 sought submissions on<br />
Lister v Romford Ice. The Analysis and Responses Paper that the Scoping Paper 106 produced indicated<br />
that 75% of respondents thought that subrogation generally should be examined. The Association of<br />
British Insurers (ABI) said specifically that the Lister Gentleman‘s Agreement, which is administered by<br />
ABI should be the subject of a review: whether such a review should be intended to form the basis of<br />
legislation is unclear. Indeed, the extract from the submission quoted in the Analysis and Responses<br />
Paper hints at the expansion of self regulation : The Review should consider, inter alia:<br />
―the extension of the application of the principles ensconced in the Market Lister v Romford Ice<br />
Agreement and clarify subrogation rules in scenarios, for example, involving members of the<br />
policyholder‘s family.‖ 107<br />
10.98 Two other submissions 108 suggested that consideration be given to allowing an insurer to sue<br />
in the name of the insurer rather than that of the insured, this overcoming objections bases on<br />
commercial grounds that are voiced by insureds.<br />
10.99 In the event the <strong>Law</strong> <strong>Commission</strong>s concluded that subrogation was not a priority issue for the<br />
<strong>Law</strong> <strong>Commission</strong> and that attention to the subject would be paid as a separate topic if time allows after<br />
the <strong>Commission</strong>‘s other work has been concluded. 109<br />
(6) Discussion and Recommendation<br />
10.100 These two public policy exceptions are too important to be left to a self regulatory mechanism<br />
such as the UK Gentleman‘s Agreement which, the <strong>Commission</strong> understands, is observed in Ireland. In<br />
any event, the issue of subrogation within families and other analogous relationships remains unresolved,<br />
at a regulatory level within the United Kingdom. The <strong>Commission</strong> are persuaded that the merits of<br />
restricting subrogation rights in these cases are not seriously debated within the <strong>Insurance</strong> Industry. The<br />
<strong>Commission</strong> also find it remarkable that an ad hoc solution such as the Market Lister v Romford Ice<br />
Agreement, first put together in 1953, should still regulate the employee liability issue despite its arbitrary<br />
results. As Gardiner pointed out in 1959; the 1953 Agreement only covered the employer‘s liability<br />
market. Further, only employees whose employer is insured may benefit from the Agreement. Gardiner<br />
concluded his view by remarking that while such a Gentleman‘s Agreement is not unique, ―[i]t may be<br />
doubted whether, on general grounds, this rather peculiar method of law reform should be encouraged.<br />
10.101 The <strong>Commission</strong> provisionally recommends that legislation provide that subrogation rights<br />
should be limited in two situations: (a) claims between family members and (b) the employer-employee<br />
relationship. The <strong>Commission</strong> invites submissions as to the precise form these restrictions should take.<br />
H<br />
Recasting Conditions and Warranties as Innominate Terms<br />
10.102 The general approach to arguments that express terms or obligations are conditions, breach of<br />
which entitles rescission or avoidance of the policy, is to require these terms to be clearly set out.<br />
10.103 Some conditions precedent have been made out even if poorly drafted. In London Guarantie<br />
Co v Fearnley 110 a policy of insurance was obtained which indemnified the proprietor of a tavern on Duke<br />
104<br />
105<br />
106<br />
107<br />
108<br />
109<br />
(2008) Can LII 65718 (SCC).<br />
<strong>Insurance</strong> Contract <strong>Law</strong>: A Joint Scoping Paper.<br />
<strong>Insurance</strong> Contract <strong>Law</strong>: Analysis of Responses and Decisions on Scope (August 2006).<br />
Paragraph 3.24. This was also the primary recommendation made in the Inter-Departmental-Review, (1959)<br />
22 MLR 652 at 655.<br />
X Changing Claims Services and the Liverpool Underwriters and Marine Association at paragraphs 3.26-<br />
Paragraph 3.270.<br />
218
Street Dublin against the embezzlement of the takings of the tavern by an employee. A claim was made<br />
and in its defence the insurer argued that a clause requiring the insured to prosecute the suspected<br />
wrongdoer with diligence had not been observed and that this was a condition precedent to liability. The<br />
Court of Appeal in Ireland found that this was not a condition precedent but this decision, (Selborne LC<br />
dissenting) was reversed by the House of Lords. Despite Lord Blackburn‘s observation that the case<br />
revolved around ―the construction of an ill-penned instrument,‖ there is no indication that the majority of<br />
the House of Lords subjected this contract to anything other than a very benign process of construction<br />
that favoured the insurer. Should the language used be held to be ambiguous the insurer will be held to<br />
have a remedy in damages only for the insured‘s breach of promise. Collateral promises may be held to<br />
exist unless the court finds that such a conclusion would not provide the insurer with appropriate reliefs,<br />
the primary reasons why the majority of the House of Lords in Fearnley held that the insured‘s failure to<br />
prosecute was a breach of a condition precedent was because it was prejudicial to the company.<br />
10.104 The argument is made that many of the difficulties that arise are a consequence of the view<br />
that contractual terms are either conditions, or warranties, in the Sale of Goods Act 1893 sense. A fairer<br />
result, on a case by case basis, could be afforded by eschewing this a priori classification in favour of<br />
holding all terms to be, or potentially be, innominate terms. The appropriate remedy would be<br />
determined, at the date of breach, according to the merits of each case.<br />
10.105 Despite the flexibility of the innominate term mechanism – the court does not have to<br />
characterise the term as being either a condition or a warranty but may decide that the parties intended<br />
the breach of the obligation would give the injured party a right to rescind depending upon the<br />
seriousness of the breach – it has been cirticised in the context of insurance law. In Friends Provident<br />
Live and Pensions Ltd v Sirius International 111 a claims notification (as distinct from a separate general<br />
notice condition precedent) was held in the English Court of Appeal not to be an innominate term. Lord<br />
Justice Mance, departing form the view of earlier English courts, 112 gave compelling reasons why such a<br />
development is undesirable. Apart from the criticism that the innominate term approach is uncertain and<br />
requires the party seeking to establish serious consequences in fact, Mance LJ pointed out that if an<br />
insurer wants to obtain a right to avoid a policy, the onus should rest upon the insurer to draft the contract<br />
accordingly. Mance LJ accepted that insurers are in a difficult position when attempting to quantify<br />
potential losses when a policy is being negotiated but<br />
―the difficulty is anyway no justification for the introduction, whether as an implied term or as a<br />
rule of law or by a previously unknown extension of the doctrine of repudiatory breach or on<br />
any other basis, of a novel form of protection for insurers. If insurers consider that they want or<br />
need such protection, they can and should try to express it in their insurance contracts and see<br />
if insureds and the broking market will accept it….[e]nglish insurance law is strict enough as it<br />
is in the insurer‘s favour. I see no reason to make it stricter.‖ 113<br />
10.106 The <strong>Commission</strong> favours the reasoning of Mance LJ on this point and do not recommend<br />
either the statutory or judicial expansion of the innominate term into insurance law to be worthy of<br />
consideration.<br />
110<br />
111<br />
112<br />
113<br />
(1879) LR 5 App Cas. 911; see however Aspen <strong>Insurance</strong> Co v Pectel Ltd [2008] EWHC 2804 (Comm).<br />
[2005] Lloyd‘s Rep. 517: see Lowry and Rawlings [2006] LMCLQ 135.<br />
Alfred McAlpine plc v BAI (run-Off) Ltd [2000] 1 LI. R 437; K/S Merc-Skandia XXXXII v Certain Lloyd‟s<br />
Underwriters (The Mercandian Continent) [2001] 2 LI R 563; Bankers <strong>Insurance</strong> Co v South [2003] EWHC 380<br />
(QB).<br />
At para. 33 of Mance J‘s judgment.<br />
219
11<br />
CHAPTER 11<br />
PROVISIONAL RECOMMENDATIONS<br />
The provisional recommendations made in this Consultation Paper may be summarised as follows.<br />
Chapter 1 – Regulatory Context<br />
11.01 The <strong>Commission</strong> provisionally recommends that regulatory bodies (in particular the Financial<br />
Regulator and the National Consumer Agency) who currently have statutory responsibilities in connection<br />
with the insurance industry should continue to liaise with each other, and with representatives of the<br />
insurance industry, in order to develop comprehensive statutory Codes of Practice setting out standards<br />
of best practice, building on the best practice standards developed by the Irish <strong>Insurance</strong> Federation and<br />
on the statutory model of the Financial Regulator‘s Consumer Protection Code 2012. The <strong>Commission</strong><br />
also provisionally recommends that these statutory Codes of Practice should form the basis for the<br />
content of insurance contracts. [Paragraph 1.68]<br />
11.02 The <strong>Commission</strong> provisionally recommends that legislation should provide that in any litigation<br />
or other dispute resolution process statutory Codes of Practice setting out standards of best practice<br />
should be admissible in evidence; and that, if any provision of such Code is relevant to a question arising<br />
in the litigation or other dispute resolution process, the provision may be taken into account in determining<br />
that question, but that this would be without prejudice to the substantive rights between the parties.<br />
[Paragraph 1.69]<br />
11.03 The <strong>Commission</strong> provisionally recommends that the legislative framework being proposed in<br />
this Consultation Paper should, in general, apply to consumers as defined for the purposes of the<br />
jurisdiction of the Financial Services Ombudsman, namely natural persons and businesses with an<br />
annual turnover not exceeding €3 million. [Paragraph 1.70]<br />
Chapter 2 – Insurable Interest<br />
11.04 The <strong>Commission</strong> provisionally recommends that legislation should provide that an otherwise<br />
valid insurance claim cannot be rejected by the insurer solely because the insured lacks an insurable<br />
interest as it has been traditionally defined, that is, a legal or equitable relationship between the insured<br />
and the subject matter of the insurance contract. [Paragraph 2.60]<br />
11.05 The <strong>Commission</strong> provisionally recommends that insurable interest should, in the interests of<br />
certainty, be more broadly defined in legislation as an interest that subsists when a person may benefit<br />
from the continued existence or safekeeping of the subject matter of the insurance or may be prejudiced<br />
by its loss; and that this definition would apply both to non-life insurance (in particular property and liability<br />
insurance) and to life insurance. [Paragraph 2.61]<br />
11.06 The <strong>Commission</strong> provisionally recommends the repeal of the Life Assurance Act 1774, as<br />
extended to Ireland by the Life <strong>Insurance</strong> (Ireland) Act 1866. [Paragraph 2.67]<br />
11.07 The <strong>Commission</strong> invites submissions as to whether, on the issue of valuation, an insurer<br />
should be free to fix any value with the proposer at the time of concluding the policy of insurance.<br />
[Paragraph 2.86]<br />
11.08 The <strong>Commission</strong> provisionally recommends that, in connection with life insurance, the following<br />
should also be deemed to have an insurable interest in the life policy: (a) spouses in relation to each<br />
other; (b) civil partners in relation to each other; (c) cohabitants in relation to each other; (d) a child in<br />
relation to his or her parent or guardian; and (e) a parent or guardian in relation to his or her dependent<br />
adult child. [Paragraph 2.97]<br />
221
11.09 The <strong>Commission</strong> invites submissions as to whether, in connection with life insurance, the<br />
following should also be deemed to have an insurable interest in the life policy: (a) a grandparent in<br />
relation to his or her grandchild; and (b) siblings in relation to each other. [Paragraph 2.98]<br />
Chapter 3 – Duty of Disclosure<br />
11.10 The <strong>Commission</strong> provisionally recommends that the pre-contractual duty of disclosure in<br />
insurance contract law should be retained, but that it should (in accordance with authoritative case law in<br />
Ireland) be restricted to facts or circumstances of which the person applying for insurance cover – the<br />
proposer – has actual knowledge; and that the duty of disclosure would not, therefore, extend to every<br />
fact or circumstance which ought to be known by him or her (constructive knowledge). The <strong>Commission</strong><br />
provisionally recommends that this modified pre-contractual duty of disclosure should apply to all<br />
insurance, other than Marine, Aviation and Transport (MAT) insurance, which would continue to be<br />
regulated in this respect by the Marine <strong>Insurance</strong> Act 1906. [Paragraph 3.22]<br />
11.11 The <strong>Commission</strong> provisionally recommends that legislation should continue to provide that,<br />
because the proposer possesses more relevant information than the insurer, the pre-contactual duty of<br />
disclosure should continue to be the basis on which a contract of insurance is a contract of utmost good<br />
faith. [Paragraph 3.27]<br />
11.12 The <strong>Commission</strong> provisionally recommends that legislation should provide that, in respect of all<br />
contracts of insurance, an insurer shall not be permitted to repudiate liability on the basis of nondisclosure<br />
of material facts of which the insured could not reasonably be expected to have had actual<br />
knowledge at the time of applying for cover. [Paragraph 3.28]<br />
11.13 The <strong>Commission</strong> proviaionally recommends that an insurer should be required to show that<br />
non-disclosure of a material fact played a part in the insurer‘s decision to enter the contract. [Paragraph<br />
3.33]<br />
11.14 The <strong>Commission</strong> invites submissions as to which of the following two definitions of ―material<br />
facts‖ should be provided for in legislation: either (a) facts which, in the circumstances, a reasonable<br />
insured would know to be highly relevant and should be disclosed; or (b) facts which, in the<br />
circumstances, a reasonable insured would know to have a decisive influence on the insurer‘s decision in<br />
accepting the risk or in setting the level of the premium (the price). [Paragraph 3.37]<br />
11.15 The <strong>Commission</strong> provisionally recommends that the insurer should be under a statutory duty to<br />
explain to a proposer both the nature of the duty of disclosure and the consequences of non-disclosure.<br />
[Paragraph 3.103]<br />
Chapter 4 – Pre-contractual Misrepresentation and <strong>Insurance</strong> <strong>Contracts</strong><br />
11.16 The <strong>Commission</strong> provisionally recommends that legislation should provide that the insurer shall<br />
ensure that any question posed in writing to the proposer is drafted in plain, intelligible language; that any<br />
such question should be specific as to the information being sought by the insurer; and that where there<br />
is doubt about the meaning of a question, it should be interpreted by reference to a standard of what is<br />
fair and reasonable. [Paragraph 4.14]<br />
11.17 The <strong>Commission</strong> provisionally recommends that if an insurer does not follow up on the failure<br />
by the proposer to answer a question, or in respect of an obviously incomplete answer, this should be<br />
regarded as a waiver by the insurer of the duty of disclosure and the duty to answer questions honestly<br />
and carefully; this would not apply where there has been fraudulent concealment by the proposer<br />
(intentional or reckless concealment). [Paragraph 4.23]<br />
11.18 The <strong>Commission</strong> invites submissions as to whether the existing duty of disclosure and/or rules<br />
on misrepresentation, intended by insurers to identify the moral hazard that an underwriter may be facing,<br />
need to be reconsidered; and in particular, in relation to convicted persons, whether there are<br />
circumstances where a conviction (other than for insurance fraud) should be exempt from the duty to<br />
disclose or the duty to answer questions carefully and truthfully. [Paragraph 4.26]<br />
222
11.19 The <strong>Commission</strong> provisionally recommends that section 20 of the Marine <strong>Insurance</strong> Act 1906<br />
should be repealed in relation to consumer insurance and mass market insurance products (including<br />
mass market insurance products to all businesses, not limited to the jurisdictional limit of the Financial<br />
Services Ombudsman); and that the duty in section 20 of the 1906 Act to furnish ―true‖ answers should be<br />
replaced by a duty to answer specific questions honestly and carefully. [Paragraph 4.34]<br />
11.20 The <strong>Commission</strong> invites submissions as to whether Part V of the Sale of Goods and Supply of<br />
Services Act 1980, which concerns misrepresentation, should be tailored to insurance contracts so as to<br />
provide a remedy in damages in place of recission (repudiation of the insurance contract) in respect of<br />
pre-contractual misrepresentations made by the proposer and the failure to observe the proposed duty of<br />
disclosure in insurance law. [Paragraph 4.46]<br />
11.21 The <strong>Commission</strong> provisionally recommends that where a proposer has exercised due care and<br />
attention in understanding the questions put and has provided the answers to such questions honestly<br />
and with due care and deliberation, the insurer should not be able to avoid liability on the policy that has<br />
arisen prior to discovery of the innocent misrepresentation. [Paragraph 4.72]<br />
Chapter 5 – Warranties<br />
11.22 The <strong>Commission</strong> provisionally recommends that the entitlement of an insurer to avoid a policy<br />
or a claim for breach of warranty should depend on whether the insured was provided at the precontractual<br />
stage, or contemporaneously with the conclusion of the contract, with the information required<br />
by the duty of disclosure (as already defined in this Consultation Paper). The <strong>Commission</strong> provisionally<br />
recommends that, in respect of promissory or continuing warranties that arise after the contract has been<br />
agreed, the insurer must provide the proposer with a clear statement prior to the formation of the contract<br />
about the scope of the continuing obliations imposed upon the proposer when he or she becomes<br />
insured. The <strong>Commission</strong> invites submissions on how this requirement may best be satisfied, particularly<br />
when the cover is obtained on-line. [Paragraph 5.22 and 5.60]<br />
11.23 The <strong>Commission</strong> provisionally recommends that statements of fact or opinion shall not be<br />
converted into a contractual warranty by anything stated in the contract, so that ―basis of contract‖<br />
clauses shall be deemed invalid. [Paragraph 5.29 and 5.62]<br />
11.24 The <strong>Commission</strong> provisionally recommends that breach of a contractual warranty in an<br />
insurance contract should no longer lead to the contract being avoided from the date of breach, but that,<br />
as in other cases of misrepresentation, the contract should be voidable at the option of the person to<br />
whom the misrepresentation was made (and that, to avoid any doubt, it should be provided that section<br />
33(3) of the Marine <strong>Insurance</strong> Act 1906, which deals with breach of a contractual warranty, is confined to<br />
MAT insurance). [Paragraph 5.58]<br />
11.25 The <strong>Commission</strong> provisionally recommends that, where an insurer is entitled to avoid an<br />
insurance policy claim for breach of warranty, the insurer should also be free to reject the claim without<br />
repudiating the entire insurance policy. [Paragraph 5.59]<br />
11.26 The <strong>Commission</strong> provisionally recommends that legislation should provide that a breach of<br />
warranty does not arise in respect of matters of past or present fact where the insured can prove that the<br />
statement was true to the best of his or her knowledge or belief. [Paragraph 5.61]<br />
11.27 The <strong>Commission</strong> provisionally recommends that where the insured establishes that there is no<br />
causal link between the failure to observe a promissory warranty and the loss the insured should be able<br />
to recover on the claim; and the <strong>Commission</strong> invites submissions as to whether the failure to observe a<br />
promissory warranty will only lead to the contract being invalidated where the insured has acted<br />
fraudulently (intentionally or recklessly). This provisional recommendation should apply to all insurance<br />
contracts within the terms of the Financial Services Ombudsman jurisdiction, even if the dispute comes<br />
before the courts. In relation to other insurance contracts the <strong>Commission</strong> invites submissions on<br />
whether a provision of this kind should serve as a default rule in commercial insurance contracts<br />
generally. [Paragraph 5.79]<br />
11.28 The <strong>Commission</strong> provisionally recommends that legislation should provide that promissory<br />
warranties must be drafted in plain, intelligible language; and that where there is doubt about the meaning<br />
223
of a promissory warranty, it should be reviewed in terms of whether it is an unfair term within the meaning<br />
of the European Communities (Unfair Terms in Consumer <strong>Contracts</strong>) Regulations 1995. [Paragraph 5.98]<br />
Chapter 6 – Exclusions and Unfair Terms<br />
11.29 The <strong>Commission</strong> provisionally recommends that legislation be enacted to provide that an<br />
insurance contract should be subject to a good faith requirement, namely that if reliance on a term in an<br />
insurance contract would constitute a failure to act with the utmost good faith the party may not rely on<br />
that term. [Paragraph 6.08]<br />
11.30 The <strong>Commission</strong> provisionally recommends that there should be a statutory duty on an insurer<br />
to draw attention to unusual terms. [Paragraph 6.10]<br />
11.31 The <strong>Commission</strong> provisionally recommends that Regulation 4 of the European Communities<br />
(Unfair Terms in Consumer <strong>Contracts</strong>) Regulations 1995 (which deals with specific circumstances in<br />
which a contract term shall not of itself be considered to be unfair) should be clarified in the context of<br />
insurance contracts so that it is provided, to avoid any doubt, that: (a) a term in an insurance contract<br />
shall not in itself be regarded as unfair where the subject matter of the term has actually been considered<br />
by the insurer in the calculation of the premium (price); (b) that this has been drawn to the attention of the<br />
proposer; and (c) that this clarification to Regulation 4 should apply to consumers as defined for the<br />
purposes of the jurisdiction of the Financial Services Ombudsman, namely natural persons and<br />
businesses with an annual turnover not exceeding €3 million. [Paragraph 6.46]<br />
Chapter 7 – Formalities<br />
11.32 The <strong>Commission</strong> provisionally recommends that legislation should provide that it is not a<br />
necessary pre-condition to the validity of an insurance contract that it be in writing. The contract may be<br />
proved by any means, including oral testimony. [Paragraph 7.40]<br />
11.33 The <strong>Commission</strong> provisionally recommends that, subject to a cooling-off period (if any), the<br />
insurer should transmit the insurance policy document to the insured within 15 working days of the<br />
contract being agreed. [Paragraph 7.43]<br />
11.34 The <strong>Commission</strong> provisionally recommends that legislation should provide that insurance<br />
contracts be subject to prescribed requirements of notices, notification and forms that are comparable to<br />
those already found in existing consumer protection legislation, such as the European Communities<br />
(Distance Marketing of Consumer Financial Services) Regulations 2004. The <strong>Commission</strong> also<br />
provisionally recommends that legislation should include a statutory duty on insurers to provide a<br />
proposer with the prescribed requirements of notices, notification and forms. The <strong>Commission</strong> invites<br />
submissions on the precise nature and content of such prescribed requirements. [Paragraph 7.50]<br />
Chapter 8 – The Duty of Utmost Good Faith – Post Contractual Aspects<br />
11.35 The <strong>Commission</strong> provisionally recommends that the law should continue to provide that an<br />
insured should be prohibited from recovering on a claim by submitting a fraudulent claim or fraudulent<br />
evidence to support a claim; but that it should also provide that an innocent co-insured or beneficiary may<br />
recover on a proportionate basis; provided that the fraudulent insured cannot benefit from the policy.<br />
[Paragraph 8.50]<br />
11.36 The <strong>Commission</strong> provisionally recommends that legislation should set out the mutual duties on<br />
the insured and the insurer in respect of claims handling, so that the principle of good faith would then<br />
remain relevant only to pre-contractual formation of the contract and as an aid to interpretation.<br />
[Paragraph 8.68]<br />
224
Chapter 9 – Third Party Rights<br />
11.37 The <strong>Commission</strong> provisionally recommends that section 62 of the Civil Liability Act 1961<br />
should be extended to allow a third party to proceed against the insurer where the insured cannot be<br />
located. [Paragraph 9.23]<br />
11.38 The <strong>Commission</strong> provisionally recommends that a third party beneficiary under a contract of<br />
insurance should be defined in legislation as a person who is not a party to the contract but is specified or<br />
referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the<br />
insurance cover provided by the contract extends. [Paragraph 9.36]<br />
11.39 The <strong>Commission</strong> provisionally recommends that, in the context of third party rights in insurance<br />
contracts, it would, in general, be sufficient to protect such rights if the Oireachtas enacted legislation<br />
based on the draft Contract <strong>Law</strong> (Privity of Contract and Third Party Rights) Bill in the <strong>Commission</strong>‘s 2008<br />
Report on Privity of Contract and Third Party Rights. In addition, the <strong>Commission</strong> invites submissions as<br />
to whether additional specific provisions should be enacted in the context of the operation of insurance<br />
contracts in specific settings, for example, in insolvency, on the death of an insured person and during the<br />
completion of a contract for the conveyance of land. [Paragraph 9.41]<br />
Chapter 10 Remedies<br />
11.40 The <strong>Commission</strong> provisionally recommends that avoidance of an insurance policy should no<br />
longer be the main remedy, and that in cases of non-disclosure and misrepresentation the principal<br />
remedy should be one of damages in proportion to the failure by the insured. [Paragraph 10.21]<br />
11.41 The <strong>Commission</strong> provisionally recommends that an insurer should be able to avoid a policy<br />
prospectively upon discovery of a negligent non-disclosure or misrepresentation even if the insurer is<br />
bound to meet any claims submitted by the insured. Should the insurer decide to exercise this right the<br />
avoidance will be effective upon giving the insured written notice of this decision. [Paragraph 10.22]<br />
11.42 The <strong>Commission</strong> provisionally recommends that any damages awarded to an insured arising<br />
from the insurer‘s failure to comply with the proposed post-contractual duties of the insurer should reflect:<br />
(a) general principles of damages in contract law, namely whether the loss is a reasonably foreseeable<br />
consequence of the breach of contract (and in particular, damages that are reasonably foreseeable from<br />
a refusal in bad faith to meet a valid claim); and (b) emerging principles of restitution. [Paragraph 10.42]<br />
11.43 The <strong>Commission</strong> invites submissions as to the period of time within which an insurer should<br />
meet valid claims. [Paragraph 10.43]<br />
11.44 The <strong>Commission</strong> provisionally recommends that legislation should provide that subrogation<br />
rights should be limited in two situations: (a) claims between family members and (b) the employeremployee<br />
relationship. The <strong>Commission</strong> invites submissions as to the precise form these restrictions<br />
should take. [Paragraph 10.101]<br />
225